Discretionaries turn to alternative ESG in hunt for returns; Global portfolios power ahead
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Ethical alternatives
ESG is increasingly seen as the answer to investors’ allocation issues. Can it extend this success to the troublesome alternatives space? Some DFMs are about to find out.
It’s already clear that 2020 has been another breakthrough year for ESG. For the first time, such strategies are popping up across the board in mainstream model portfolios as well as dedicated sustainable ranges.
But while these funds’ returns largely held firm amid the sell-off and beyond, discretionaries have again found that some of their diversifiers failed to do likewise. So, in the aftermath of the Q1 sell-off, many wealth firms have expanded their alternative horizons still further in a bid to find the right fund.
Among the array of options available to selectors, there’s a new beacon starting to shine. There aren’t many ESG long/short funds around, but their number is starting to rise. JPMorgan launched such a strategy in March, and one offering that’s been attracting interest from fund selectors on the continent is the Protea Eco Advisors ESG Absolute Return fund. Our fund selection database shows a couple of UK DFMs have now added it to their buy-lists, too.
In many ways such strategies represent a reversal of the way the ESG industry has evolved. Long/short ESG funds effectively return to the screening-out methods of old – except this time they actively bet against companies deemed to be unsustainable or unethical. Such approaches have investment merit, if you believe that some shares really are now being penalised for operating in controversial areas.
The proof will be in the performance – and the Protea fund, for one, has impressed by posting a positive return so far this year. The worry for buyers is that adding ESG overlays to alternatives buckets simply gives them more quality growth exposure. But at the moment, that may be a risk they’re willing to take.
Risk on
After another topsy turvy year, it’s worth checking in on DFM performance metrics to see how they’ve fared thus far. The news from Arc remains relatively positive - insofar as most portfolios are still operating as they’re supposed to.
As of the start of September, the Sterling Cautious private client index is now back in the black for the first time since January. The Balanced, Steady Growth and Equity Risk equivalents remain down year to date, but the spectrum of returns remains consistent: riskier indices have lost more than their more risk-averse equivalents.
Pimfa’s private client indices, however, are still a little out of whack. Its riskiest metric, the Global Growth index, is 3.5 per cent higher so far this year. That compares with a loss of 2.2 per cent for its Conservative benchmark, and 5.5 per cent for its Growth offering.
The difference is that Pimfa’s Global index, as you’d expect, materially dials down the UK exposure. That means it effectively has US equities as its principal constituent. At a time of great uncertainty, the investors taking the greatest gambles are still being rewarded more than those sitting on their hands.
Returns like these are only a snapshot of a moment in time, of course. Will this discrepancy last? September looks like it might be something of a test case, given continued falls over the Atlantic. Thus far, the Global Growth index is still holding up well enough: shedding just 38 basis points more than the Conservative index. Time will tell whether DFMs have to give more serious thought to how their riskier portfolios fit in with the rest of their ranges.
Mortgaged up
This month is also a test case for the country’s most popular investment trust. Baillie Gifford will be happy enough that position limits forced them to cut back on Tesla just before its current dip – though that disclosure probably helped moved the market, too.
In any case, Scottish Mortgage hasn’t escaped the tech sell-off. The trust’s share price, like its peers and the Nasdaq itself, is off 10 per cent from recent highs. With US markets closed yesterday, investors seized upon a rare opportunity to buy the FTSE 100 portfolio at a material discount to NAV. Today, however, the US is back and tech continues to struggle. The result is that Scottish Mortgage’s share price is more or less back to where it was on Friday. This year has shown that retail investor might is real – overseas, at least. But it’s unlikely that the trust’s legion of UK followers will be able to prop it up should tech continue to slide.
