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Sustainable portfolios slip back - but the fund sales bandwagon rolls on

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Sticking it out

The performance of riskier shares over the past couple of weeks emphasises that the China-related panics of late September have subsided for now. Even Chinese stock markets have begun to rally a little.

Commodity prices, meanwhile, have continued to rise – a trend that brings problems of its own for wealth managers nowadays. With oil and gas stocks being bid up as a result, this hasn’t been the best environment for sustainable strategies.

Nonetheless, SocGen points out that the performance differential between climate funds and mainstream equivalents has proven “quite limited” of late. The bank’s European ESG index remains ahead of the Stoxx 600 this year.

Our own analysis shows DFMs’ sustainable portfolios haven’t quite matched that effort. The majority are lagging their conventional counterparts in 2021, and near term underperformance has also been more pronounced.

That could be because the typical ESG balanced portfolio is less overly focused on climate than the specialised portfolios identified by SocGen. And in fairness, there are one or two sustainable discretionary offerings that have continued to outperform.

Regardless, investor appetite shows little sign of dimming. Figures from Morningstar show sustainable funds accounted for seven of the ten most popular funds by net retail flows last month in the UK.

Separate statistics from the data provider tell a similar story. Flows into European ESG ETFs rose from €12.5bn (£10.6bn) in the second quarter to €14.7bn in the third. More to the point, they accounted for some 43 per cent of all ETF money invested in Q3, up from 28.4 per cent in the previous quarter.

Staying put

The rest of those Morningstar figures confirm that the August buying and selling trends we discussed on Monday continued into September. Retail fund buyers soured on bonds this summer in the aftermath of the latest price rally, but the September sell-off didn’t convince them to buy back in.

According to the data provider’s estimates, more money was withdrawn from fixed income funds last month than any time since the March 2020 sell-off.

For investment grade credit, the picture was even gloomier: some £1.7bn was withdrawn from sterling corporate bond funds on the month, the highest amount in at least 13 years.

There are caveats to this figure: a significant chunk of the redemptions came from just three portfolios, including £650m from the closure of a strategy run by UBS. M&G Corporate Bond and iShares Corporate Bond Index were the other two main sufferers, per Morningstar’s estimates.

Given this was a month in which both bond and equity markets suffered, the overall flows picture could have been a lot worse. Morningstar said a total of £1.3bn in net inflows for equity funds was “comparable to some of the better months [for the asset class]” this year.

Appetite for sustainable strategies played a part here, naturally. All the same, the evidence suggests it will take more than a month of poor returns to dislodge investors’ appetite to add new money. Wealth managers will say that’s as it should be – but after months of healthy returns there's always a fear that flightiness could quickly resurface.

 

Giving back

 

It’s not just US corporates that are back on the buyback trail. UK companies, too, are expected to end the year having repurchased a not inconsiderable amount of shares, according to estimates from the Lex column.

Other quarters are tipping something of a buyback bonanza to emerge in the UK – where dividends have traditionally ruled the roost. The £500m plan announced by Tesco last week would be indicative in this regard.

Advocates of buybacks also think the recent changes to investment taxation work in their favour.

A 1.25 percentage point rise in dividend tax doesn’t inspire thoughts of a step-change in investor thinking. But it certainly can’t hurt the case for companies to shift some of their focus away from dividend payouts.

All the same, as corporates continue to grapple with supply chain issues, some might be starting to think all this spare cash could be put to better use internally.

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