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Credit Suisse’s latest global investment returns yearbook has some bad news for those interested in ESG - to be more specific, those interested in accurately defining what ESG means at a portfolio level.
Measurement concerns have been around for as long as the subject itself, clearly. But the sea change in interest seen over the past two years alone has made these issues more pressing for fund selectors. And Credit Suisse suggests third-party rankings will do little to help them make the right choices.
Examining three ratings providers - FTSE Russell, Sustainalytics and MSCI - the yearbook authors find there are “stark” divergences and “a remarkably low level of agreement” when it comes to individual company rankings. Ratings around governance, in particular are “exceptionally low”.
The root causes include both too little and too much information: raters take different approaches to dealing with a lack of data from companies. At the same time, there’s no agreement on how to measure or rank information that’s increasingly being made public.
So while there’s also some good news - the study agrees previous research suggesting ESG options mean little in the way of performance sacrifice - there’s still little evidence that greater interest in ESG is leading to an industry-wide set of standards.
That will prove a particular problem for wealth managers, who can’t simply rely on one ratings provider - and are instead bound to the choices made by individual fund managers. As interest in ESG offerings continues to grow, those constructing portfolios will find themselves vulnerable to challenge by more knowledgable clients - or even, ultimately, by regulators.
More than half of all financial advisers now outsource to a DFM, according to the Lang Cat’s annual ‘State of the Adviser Nation’ survey released yesterday. And outsourced discretionary offerings account for about a third of this group’s business - meaning DFMs now manage 18 per cent of the advice industry’s investment assets overall.
The rest of that money is split between in-house services (42 per cent), multi-manager or multi-asset funds (30 per cent), with another 11 per cent in packaged ranges, where a provider’s investment proposition is intrinsically linked to a particular product. So a degree of client segmentation is clearly at work here.
The Lang Cat also notes there’s an “astonishing proliferation” of options still be launched, whether that be multi-asset, MPS or bespoke DFM. Counterintuitively, the consultancy says this fragmented marketplace means there are opportunities for disruption and/or niche offerings.
But fund selectors are unlikely to be able to achieve this by themselves: “the real difference may be in the package rather than the engine”. The makes sense, given the relative similarity of the model portfolios we catalogue in our own fund selection database.
Providers are having to think harder about how they differentiate, and that increasingly means providing something different from sophisticated portfolio construction alone. As the Lang Cat also notes this week, Premier Miton is preparing to launch a platform-like service that will host its multi-asset funds for free, as well as being able to facilitate adviser charging and the like. Lowering costs for clients in this way might be just as important as asset allocation in future.
Another 2 per cent or so off the FTSE 100 this morning puts the index on course for its worst week in eight-and-a-half years, and increases the risk that wealth firms have to once again prepare those ’10 per cent drop’ letters.
The initial communication challenge will, at least, be less of a factor this time: it’s hard to imagine a client incapable of working out for the catalyst for the sell-off. Ensuring panic doesn’t set in will prove more difficult, given the connection between market concerns and public health.
Allocators themselves will feel a drawdown was overdue - even if the outlook just a few weeks ago looked as though it was set fair for risk assets once again. But factoring in a global recession, rather than a simple market dip, is easier said than done. At this stage, uncomfortable as it may sound, there’s little to do but await more data.