Asset AllocatorMay 14 2020

Allocators' 'best metric' for predicting risk; The veterans prepared for a new crisis

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X factor

The reasons for ESG’s recent outperformance look obvious: avoiding companies exposed to the oil price shock, and prioritising quality stocks, have been significant tailwinds during the current crisis.

Be that as it may, there’s more to ESG than a slightly more convoluted route into quality investing. That’s according to Bank of America, whose 105-page report on the subject says, in short: ESG measures are uncorrelated with typical quality metrics like return on equity and return on capital, and superior to other quality measures.

On top of that, the bank adds ESG is “the best metric we’ve found” for predicting risk - better than leverage or any other factor. But there’s a problem: its growing popularity means, similar to the market’s preference for low vol stocks, qualifying companies have seen share prices bid up.

As a result, BofA suggests investors should combine ESG attributes with other fundamental factors like valuation, growth, and indeed quality. Those who've already done so, it says, have “consistently outperformed fundamental strategies, with less risk”, according to its analysis of US share price returns.

By implication, that’s good news for DFMs who’re increasingly adding ESG layers to their own portfolios. BofA says US equity income investors, for example, would have boosted average returns by 200 basis points per year had they added an ESG screen.

Of course, discretionaries’ own increasing interest in this area means it’s not just ESG shares and funds that can now be benchmarked: so too can multi-asset strategies. So next week we’ll take a closer look at how wealth managers’ own ESG portfolios are faring, in terms of both performance and diversification.

Big fish

Giles Hargreave’s decision to step back from fund management at Marlborough has been a long time coming, which means the firm's had plenty of time to make succession arrangements. Be that as it may, his move away from day-to-day management means there’s now one fewer veteran investor out there for fund selectors.

Fortunately for those who prize longevity as a metric, the UK Smaller Companies space is still full of the old guard. The number of small-cap managers who’ve run their funds for more than a decade is well in excess of those in other sectors.

To be precise, 12 years’ worth of experience is much more valuable nowadays than a mere decade at the helm. The former number means managers were in charge of their strategy when the financial crisis hit.

From a market perspective, 2020’s crisis has been surprisingly easy to navigate thus far. But that doesn’t mean selectors won’t be prioritising those with experience of the real thing. The chart below shows the proportion of funds in a given sector whose manager has been in charge for 12 full years or longer:

 

UK small-cap strategies’ dominance is immediately clear: managers like Harry Nimmo, Paul Jourdan and the team at Aberforth mean fund buyers have plenty of choice in Mr Hargreave’s absence. Options elsewhere are more limited, but on average one in five funds still has a relative veteran at the helm.

The most surprising result is perhaps UK Equity Income. There’s still plenty of experience among managers here, but not quite as many true stalwarts as there once were. Few are in doubt that 2020 will be a tough year for dividends: what’s up for debate is whether managers in the sector quit while the going’s good or try to tough it out for their investors.

Platform for growth

From Hargreave to Hargreaves: the D2C platform market leader continues to shake off the doubters, per its latest trading update.

The Woodford affair, recent share sales by its founders, an uncertain future for its Wealth 50 list, rising regulatory costs and Q1 market turbulence have all failed to knock it off course. Assets may have fallen by £8.5bn (to £95.7bn) in the four months to April due to the volatility, but the platform still managed to take in a net £4bn in new business nonetheless. Higher trading volumes, meanwhile, meant revenues rose to £190m, up from £160m a year before.

At this point, there’s little evidence that the company’s position remains anything other than impregnable. Whatever the rest of 2020-21 holds for risk assets, the platform’s ability to withstand the blows of the past 12 months have only served to underline its dominance.