In Focus: Sustainable investing  

Is investing in US bonds a moral hazard?

Is investing in US bonds a moral hazard?
Photo: Karolina Grabowska via Pexels

Does investing in America confer moral hazard? 

This was a question posed recently by managers at Evelyn Partners, who spoke at an event of the difficulty managers face when balancing a need for income and inflation protection with the need to follow environmental, social and governance matrices. 

For example, one of the managers asked, would investing in short-dated T-Bills or high-quality US corporates be considered a wise move for long-term portfolio diversification or a breach of ESG ethics?

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The manager asked: "What of the reversal of Roe vs Wade? What of the fact the US keeps dipping in and out of the Paris Agreement?

"What might investors feel about the fact there is the death penalty in 24 states or the fact that the right to bear arms is enshrined in the Constitution?"

FTAdviser approached US and fixed income managers to ask whether investing in the US could pose moral hazard.

Richard de Lisle, manager of the VT De Lisle America fund, said: "If investing in America confers moral hazard, then it’s not just T-Bills this conjecture applies to.

"The asset of choice this bear market is the dollar. In the 1970s, the nearest period by analogy, was gold.

"However, in the 1970s Nixon had shot the dollar in both feet by coming off the gold standard in 1971, so the dollar wasn’t trusted as an inflation hedge even though the US was a relatively sound and lower inflation constituency.

"Today there is nothing more trusted: the US has the strongest economy, is ahead in the interest rate cycle and is protected from supply shenanigans by being a petro-currency.

"Thus, the dollar is the ultimate risk-off bet, typically expressed through T-Bills."

But he said if the proposition that investing in T-Bills would equate in some investors' view to a breach of their ethical values, he said there were more questions an investor should ask.

De Lisle explained: "If this proposition is a quandary, how do the ethical investors feel about the dollar itself, or the US equity market which is fully 60 per cent of the world cap?"

Moral relativism

Therefore investing in a passive fund, or in any fund with exposure to the US, could expose investors to 'moral hazard' if they feel the US is indeed a market they would prefer to avoid on ESG principles.

But, de Lisle said: "Instead, let’s consider US moral relativism.

"No polarisation of US voters makes the US truly populist due to the checks and balances of democracy.

"Here’s an example: the Trump appointee Clarence Thomas revokes Roe v Wade and ushers in the best hope for the Democrats in the mid-terms.