Wealth managers face double bind on ESG selections; The surprise UK equity picks of the year
A quick announcement: Asset Allocator will be holding a webinar for wealth managers, asking whether DFMs' ESG allocations are fit for purpose, on December 9. Click here to find out more, and to sign up - we hope to see you there!
The big screen
As the number of ESG funds – or funds that “incorporate ESG into their process” – starts to mushroom, selectors need to be on their guard now more than ever. Ultimately, it’s up to fund buyers to work out exactly which products are delivering the goods, and which are engaged in little other than greenwashing.
There are a number of ways to approach the topic; one simple starting point is to break things down and interrogate how well a given fund meets individual E, S and G demands. In many cases, of course, that might require information from managers that isn’t yet easily available. The reality has yet to catch up with the marketing in many cases.
In this context, it’s perhaps no surprise that DFMs are sticking to a narrow set of funds in their specialist ESG portfolios. While these portfolios do tend to differ materially from wealth firms’ mainstream offerings, they don’t differ from one another much at all.
A look at 16 ESG ranges run by UK DFMs shows that they hold a total of 120 funds between them, which doesn’t sound so bad on the face of it. But the core funds held by these ranges tend to look pretty similar: Rathbone Ethical and EdenTree Amity Short Duration on the credit side of things; Liontrust, Royal London and BMO for UK growth, and Janus Henderson and BMO again for global growth. And as we noted last month, it's a similar story for regional equity allocations.
This all emphasises something of a double bind for wealth firms: as ESG interest grows, there will be pressure put on them to distinguish their own holdings from peers. But finding new or unheralded options requires even more careful scrutiny than is needed for conventional portfolios.
Then again, there are areas of the fund universe where ESG buyers are yet to take the plunge. Our webinar next Wednesday will discuss one of these areas – government bonds – in more detail. See the link at the top of this newsletter for more details, and for sign up info.
Surprise favourite
Latest fund flow analysis from Refinitiv might come as a surprise to wealth managers: they suggest that UK equity investors have bought into value at the expense of growth funds throughout 2020.
The company’s data indicates a £3.4bn inflow into UK value strategies this year, compared with the £2bn that’s been added to growth funds. That would mean investors have shown an admirable ability to ignore short-term performance – the average value fund had lost 25 per cent this year prior to the November rally, compared with a drop of 8 per cent for growth strategies, according to the data provider.
Either way, it certainly doesn’t tally with discretionaries’ own activities. Last week we highlighted how value stragglers were among the biggest ‘sells’ of the year for professional fund selectors. On the growth side, it's true there have been some outflows from Lindsell Train and Liontrust’s UK offerings in the short term (and these funds do admittedly have more AUM to lose in the first place). But those register as blips rather than major redemptions.
Instinctively, it also feels like retail investors will have had more reason to get rid of value strategies this year. High-profile manager departures – including that of Mark Barnett, whose funds sit in the UK All Companies sector used by Refinitiv as part of its analysis – will have had a big role to play here. So either advisers have been extremely contrarian in their activities this year, or this is an unusual statistical quirk that’s perhaps influenced by one or two big buyers or sellers.
Yielding ground
It was probably inevitable that US treasury yields would experience one of their biggest rises of the year on the day we touted US government debt’s enduring resilience.
Some coverage of that move has got ahead of itself – few allocators will be worried about a “domino effect” quite yet. But the rise is a reminder that even treasury prices aren’t able to withstand every market dynamic.
The same applies to gilts, which have also seen yields tick higher of late, amid the perception that negative base rates are now less likely. But it's DFMs’ newfound treasury positions that may require more careful analysis, particularly if they are factoring in hedging costs in an environment where the dollar is starting to fall.