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Wealth firms' sustainable offerings show their strength; Advised portfolios' domestic dangers

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In performance terms, a little of the gloss has come off sustainable funds this year. The rotation to value may have paused for now, but the fact remains that sustainable securities are no longer uniformly outperforming.

While ESG-related fund flows continue to soar, some parts of the sustainable investing space, like clean energy, have been hit pretty hard in recent months.

Year to date returns underline some of these struggles. More than 40 per cent of funds in the IA universe branded as ‘sustainable’ are fourth quartile year to date, according to FE Analytics data.

As ever, this should be put into perspective: six months of relatively minor underperformance is nothing to get overly concerned about. Recent returns have been outsized, after all. And the ESG investing rationale arguably requires investors take an even longer-term time horizon than usual.

Still, there are some quirks in the data that are worth drawing out. Short-term underperformance has been particular stark in the multi-asset space, where three-quarters of sustainable unitised funds have underperformed peers so far this year.

In DFMs’ world, however, there’s little sign yet of ESG being a laggard. Sustainable moderate portfolios did lag their conventional counterparts in the first quarter, but a better Q2 meant many either narrowed the gap or closed it entirely. Like many in the investment industry, discretionaries talk a good game on sustainable investing. For now, they’re backing that up where it matters, too.

Comfort zone

A study published today by Quilter looks at home bias in retail and advised portfolios, and the results suggest it’s the latter who are more likely to fall foul of the issue.

Some 64 per cent of those with £60,000 or more in investible assets held more than 25 per cent of their portfolio in the UK, according to the survey. For advised investors this proportion rose to 82 per cent.

Similarly, the share who had more than half in the UK stood at 46 per cent overall and 56 per cent for advised investors.  

There could well be other biases at play here: as Quilter notes, many direct investors may be bunching in “riskier areas…such as US tech, and have all their eggs in one basket there”.

By the same token, the survey doesn’t take into account how well-balanced portfolios are across different asset classes.

Nonetheless, the findings do perhaps speak to a residual failing among those advisers who feel comfortable enough picking UK equity funds – rightly or wrongly – but less confident branching out overseas.  

Whether or not the minor renaissance enjoyed by UK equities in recent months continues, this is a problem worth resolving. DFMs need little excuse to tout the merits of outsourcing portfolio management, but they will find more grist for their mill in these results.

Regular readers of this newsletter will know that discretionaries’ own balanced portfolios tend to have 15 to 20 per cent in UK equities, a position that varies only marginally in the case of more cautious or more aggressive portfolios. That level of exposure, needless to say, looks a more sensible option for the diversified investor.

Role reversal

For those keeping track of such things, one impact of the ongoing pause in the reflation trade is that US growth shares are now ahead of their US value equivalents on a year-to-date basis.

That’s quite the shift considering there was more than 10 percentage points between the two just a couple of months ago. As with the current government bond rally, it inevitably brings to mind the false dawns of years gone by. So has normal service now been resumed: is this peak growth and peak inflation, as some suggest?

For now, the majority are likely to stick with a path inbetween the two. A theory we discussed on a recent podcast is now gaining more currency: just as investors were arguably too worried about inflation in March, they’re perhaps now too complacent.

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