InvestmentsOct 10 2019

How to make the right choice

Supported by
Rathbones
twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Supported by
Rathbones
How to make the right choice

As has been noted in other sections of this guide, consumer demand for sustainable funds has been a prime driver of growth.

But as has also been flagged, clients will likely have different ethical requirements, and so there is no such thing as a one-size-fits all approach for managers when designing and distributing a fund.

This means that advisers need to take a through look underneath the bonnet of any prospective fund.

Terminology

“There’s a problem around the terminology used in this space and descriptors such as ethical, sustainable, responsible, and impact are often used interchangeably.

This is wrong as there are clear differences between the approaches; though much overlap too, hence the challenge,” says John David, head of Rathbone Greenbank Investments.

Descriptors such as ethical, sustainable, responsible, and impact are often used interchangeably John David, Rathbone Greenbank Investments

“Advisers need to ensure they have a good grasp of the range of definitions so that they can fully assess the products or services they are considering for their clients.

“The range of available options is growing but is still limited relative to ‘traditional’ investment.

“It is certainly possible to create a well-diversified portfolio for the majority of clients, but if they have very specific interests or concerns a bespoke portfolio management approach may be more suitable than one comprising funds only.”

He goes further, explaining that the term ‘ethical’ can mean different things to different people, making it essential that funds which style themselves as ‘ethical’, ‘socially responsible’, ‘sustainable’, and ‘impact’ are completely transparent about what they are offering.

Mr David also lists a number of factors intermediaries should consider when selecting the right investment manager and/or fund. These include:

  • The experience of the firm or team.
  • Whether the manager supplements data from external providers.
  • Can individual criteria be accommodated?
  • Does the manager engage with investee companies

Investor profile

In terms of client types, it has often been assumed that millennials and their younger counterparts are the most likely to seek investments with an ethical approach.

But Clive Selman, head of UK distribution at Hermes Investment Management, explains this is not necessarily the case.

We are actually seeing a much broader appeal across a range of clients Clive Selman, Hermes Investment Management

“We have seen a growing demand from clients looking for products that offer long-term, risk-adjusted outperformance, while also delivering societal and environmental returns.

“It is commonly thought that this interest is predominantly from a millennial investor base, but we are actually seeing a much broader appeal across a range of clients in the advisory and wealth space.”

But although interest in the sector seems to be on a sharp upwards trajectory, a couple of years ago the sentiment - with advisers at least - was less encouraging.

An Advantage poll conducted by FTAdviser in October 2017, found that 45 per cent of advisers said ethical funds and investments were popular among less than 20 per cent of their clients, while 33 per cent admitted to never even discussing ethical investments with their customers.

This prompted a mixed response from advisers; with some saying the figures were reflective based on their own client discussions, but others, including Claire Walsh, now head of advice strategy at Schroders, voiced dismay.

Ethical preferences

At the time, she said: “We have a duty to discuss these things and I find asking people if they have any ethical preferences on how their money is invested is very easy and then you can discuss more broadly if they are interested.

“I’d say the majority of clients who ask where we do invest money, they do invest this ethically.”

Perhaps some of this has played into the perception that an ethical approach is likely to be at the expense of higher growth. But this sentiment is now changing.

“Thankfully, there is a now a wide acceptance that this is not the case - that investors can have both a good investment as well as a strong social return,” says Greg Mullins, sales director at Rathbones.

He adds: “As the popularity of ethical or sustainable investing increases, our experience has been that there is no single demographic or ‘client-type’ leading the way.

“It is a true a mix, encompassing ages, backgrounds, risk profiles and personal circumstances.

“The common trait, however, is an increasingly active interest and desire to ensure their investments are aligned to areas and businesses that are not only doing good but crucially are not doing bad.

“Whichever you way you look at, it makes sense to align long-term returns with those long-term interests that affect us all.”

Apply the basics

Meanwhile, perhaps the overriding message for advisers operating in this space is to apply the basics; asking the right questions and then applying the resulting knowledge into selecting the appropriate products and fund.

The situation with ESG funds is no different. And although some intermediaries are yet to dip their toe into the sector, their inherent skills should leave them well-placed to navigate any potentially tricky parts.

There is other help available too, as Mr Kenny states.

“The various options which can help a client meet these objectives then need to be carefully weighed up and explained.

“When it comes to applying these requirements to fund selection, there are a number of sources and independent consultancies which have increased the information and guidance available on funds in this arena and in some instances have grouped these types of funds together in lists of investable vehicles to enable quick identification.

“The key point is to understand what the client is looking for to help them understand the options available.”

craig.rickman@ft.com