Comparing ESG Scores
Spring 2020 was a landmark quarter for Environmental, Social and Governance (ESG) fund sales with 76% of European fund inflows allocated to ESG tilted choices. This is way ahead of the US experience suggesting a divergence of investor preferences, with Europe leading the ESG charge.Yet securing analytical evidence for outperformance between funds claiming an ESG characteristic is more of a nuanced story. There are some studies showing outperformance whilst others show the opposite. With claims of ESG compliance mushrooming, it is worth probing the strength of the link between ESG performance, typically measured using scoring systems, and the equity performance.Over recent decades, there have been more than 2,000 empirical studies and several review studies on the relation betw…
April was supposed to be the month that the underperforming Value and Small cap factor premiums rebounded from their painful COVID-19 crash. After all, that is exactly what famously happened after the TMT crash in 2000 when traditional Value stocks enjoyed a recovery after long periods of underperformance (1).
And sure enough global small cap stocks registered an impressive bounce during April, rising 23.9% from lows in March against a 17.2% move in the overall market. That’s something, perhaps not overwhelming, whilst Value just tailed the market benchmark. Most Value investors, and many (but not all) Small cap investors, know that they have to take a long view and swim against the tide of take-downs and negative opinion which can at times seem overwhelming.
Dividends are being cut at a pace unimaginable a few weeks ago.
Company boards in every country are scrambling to conserve cash, comply with strings attached to state subsidies and performing pivots, if not pirouettes, between the short and long-term interests of a gaggle of stakeholders ranging from employees, investors, bankers and underfunded pension funds. Among energy companies for example, Shell have just cut their dividend whilst BP are holding out. Dividends in this environment can hardly be viewed as anything other than a highly discretionary signal from company managements to their stakeholders.
Some of our clients are worried about dividends too.
In March 2018 it appeared that global growth would exert pressure on interest rates, forcing the rate of inflation ever higher, making bonds a weaker investment prospect. Things have not worked out quite as market participants then might have expected.
The Fed’s policy changes and quantitative tightening in 2018, combined with the high existing global debt levels snuffed out any inflationary impulse. Following the COVID-19 fuelled stockmarket crash bond yields all over the world are now 1% or less.
Lockdown during the 2020 crisis has brought out the best and worst of people.
Surprisingly, most people have complied with the lockdown albeit without much enthusiasm. Meanwhile a minority, not just rebellious teenagers, discard self-control and are tempted to breach the regulations, risking fines.
Saving with stock market investments for any objective is just as difficult because it needs willpower, self-control and discipline to stay with your plan to achieve what may seem like an abstract and faraway objective.
Life is teeming with examples of how willpower is tough to maintain. Gym memberships and diet clubs such as Weight Watchers, alcoholics anonymous and substance abuse clinics are typical ways people reach out for help with problems of self-control.
The first Quarter of 2020 was the poorest equity market performance since 2008 for the S&P 500, but that was not the weakest asset class.
The oil market had a truly dreadful 3 months, falling by a massive 66%, its worst ever quarterly return. The refusal of Russia to agree to cuts in oil output levels by OPEC+, the OPEC nations plus Russia, led to Saudi Arabia discounting their oil prices and gearing up oil production to force prices lower.
March 2020 will long be remembered as a month when information overload was tested beyond imagination. Embattled investors had to deal, not only with an imminent threat to life against themselves and their families, but also with violent liquidity and price collapses across asset classes, including even long bonds and gold.Diversification seemed momentarily to have failed. As it happens, it was also the perfect moment for me to start a new role as Investment Manager at EBI.Scanning through the market crashes of the past we see both uniqueness and commonalities. The 1973-4 crash left the US markets down around 45% and the UK down 67%. The 1987 stockmarket crash was over relatively quickly with a “V” shaped market and economic recovery. In 2000 the Technology, Media and Telecoms (TMT) bubble ended with a two-year blowout elongated by the events of 9/11. The Great Financial Crisis (GFC) of 2007 onwards was long drawn out with unprecedented levels of intervention led by Fed Chairman
The Coronavirus panic has changed quite a few things in its short life.
We no longer stand within two metres of each other without being forcefully reminded to move apart, we no longer seem to mind washing our hands several times per hour or the restrictions being placed on our everyday lives in the name of “flattening the curve” , whilst governments across the world have awoken from their apparent apathetic attitude towards the economy’s performance.
The latest US and UK stimulus packages, in addition to the usual Central Bank monetary responses, cutting rates, printing more money, provided banking system liquidity infusions, are now leading governments into the realm of fiscal policy or state spending; it is almost as if the Coronavirus has decided that we were to have a UK socialist government irrespective of the last election result.
Things are getting wilder by the day - it is said that markets stop panicking when Central Banks start panicking, and it appears that they have now done so. According to Goldman Sachs, there have been 14 days in the last 23 when the S&P 500 has moved up or down by more than 3%, the highest concentration since 2009.
The moves in US equities for the last week have been, shall we say, unusual.
12/3: Limit Down
13/3: Limit Up
16/3; Limit Down
17/3: Limit Up
18/3: Limit Down…
As unexpected shocks go, Coronavirus ranks in the very top tier of events capable of disconcerting investors, amongst the Great Financial Crisis (GFC) and Black Monday. Whilst news continues to horrify many investors with the human and economic implications, buried in the latest data in what statisticians refer to as “the inflection point of a logistics curve”, is a sign that the very worst may be over.
- February news was dominated by the global spread and impact of the Coronavirus (Covid-19). Dow Jones, S&P 500 and the FTSE All-Share fell by over 14%, 12% and 11%. So far in March (16th March 2020), these Index markets have been continuing their decline and the correction has now developed into a full-scale bear market.
Technology stocks are the top dogs of the stock market. For the last 6 months or so, they have risen almost without a pause and have become a greater and greater influence on the direction of the overall stock market. Last month, the big four MAGA stocks (Microsoft, Amazon, Google (Alphabet) and Apple) reached the point where they represented over 17% of the total S&P 500, and contributed almost 70% of the gains attributable to that Index in 2020 alone.
How did they get this big and thus so influential on both the stock market and the wider economy? There was of course a lot of hard work, plus some innovative ideas, but they had a few advantages that were (mostly) unavailable to other firms. If you want to become a “tech titan”, some or all of the following tailwinds need to be behind you.
The information on this page is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. It is not intended for retail investors.
It has been an “interesting” week. In the space of just 6 trading days, the Dow Jones Index went from all-time highs to a “correction” (defined as a 10% fall from a high point). Reportedly, every continent on the globe is now infected (apart from Antarctica) and there have even been deaths in high political circles- for now in Iran, but other senior government personnel in other countries will inevitably follow, which may concentrate minds at decision-making level.
Returns to the Value factor continue to disappoint. Against Momentum it has been almost one-way traffic for the whole of 2020, whilst in the longer term, we are now approaching the low point (for Value relative to Growth) reached in 2000 as per the Russell 1000 Index. [The Russell 1000 Index represents the 1000 largest capitalisation firms in the US]. Brief spikes in Value (as seems to be happening currently) last only a few days, before the selling resumes anew.
[Note: the chart below plots Value against Momentum, not growth; but a nearly all the highest momentum scoring shares ARE growth shares, they amount to one and the same].
In case there should be any doubt, it IS a global phenomenon; only US Value has beaten the MSCI World Index, and all major Value regions have even lagged long-dated UK Government bonds, which are a risk-free asset.
Harold Macmillan, the UK Prime Minister between 1957 and 1963 was reputed to have replied “events dear boy” when asked what the most likely thing would be to knock his government off course. With the increased focus on Sustainable and Socially Responsible investing it now seems that there is significant “event risk” involved in running a company in contravention of these principles and the bigger and more high profile it is, the more dangerous things can get.
The world seems more than ever eager to take offense. What would once be dismissed as a joke or mild criticism is now portrayed as something akin to assault, regardless of the intent behind the statement. The resignation of Alastair Stewart in recent days as a result of a (somewhat concocted) row on Twitter with another user is but one in a long list of the famous who have been brought low by controversy.
EBI Portfolios adopt a buy and hold strategy, which means that one year performance is not a sound basis for decision-making with regard to asset allocation etc. However, we recognise that clients wish to know how their assets are performing and so a yearly review is undertaken to allow them to understand the sources of returns; it is not always possible to discern the rationale for why millions of investors (most of whom are much better informed than we are) do what they do, so any interpretations offered here are just that-interpretations- and may be in error. But taken as a rough guide, it may help investors to better understand how markets have performed in 2019. On the basis that any information is better than none at all, we offer the below.
EBI’s ESG-integrated portfolios are now live. To mark the launch and in the run up to 2020, it’s an opportune moment to look back at the series of ESG blogs we have run over the last few months and to summarise the key takeaways for financial advisers.
Firstly, demand for passive solutions is soaring. As previously mentioned, an ETFGI report found that global ESG ETFs/ETPs assets increased by almost 30% in 2018 ($7.6 billion in net new assets) whereas assets in equivalent non-ESG funds grew by less than 5% in the same period.
Is ESG therefore a fad, with ETF providers jumping on the bandwagon? As we’ve discovered, there are ETFs for almost every whim nowadays – including a ‘vegan’ ETF which still has a heavy proportion invested in tech stocks.
From time to time both ourselves and our clients get contacted by journalists looking for quotes and views on the debate surrounding Active and Passive Investing, which (usually) revolve around asking us what our investment approach is, or how we use the two types of investment strategies for our portfolios. So, in order to formalise our response and to give clients an idea of how to respond should they receive similar enquiries, we decided to put our views down “officially”, in the form of a Q&A.
The concept of “satellite and core” is a key discussion among financial advisers when it comes to portfolio construction. In essence, core investments make up a bigger proportion of long-term invested assets, and tend to be passive funds, while the satellite can perhaps include some riskier or more exotic active investments for the shorter term and tactical plays.
This model is designed to lower costs, be more tax efficient, minimise volatility and provide some opportunity to outperform the markets - and it can be applied across investment vehicles, strategies, and asset classes. (Although it’s not to be confused with the typical way we talk about equities versus bonds - say, 60% for the former and 40% for the latter for a typical medium-risk portfolio - because both are typically longer term.)
And this is where ESG comes in. So, do you hold ESG at the core or satellite?
More than two years ago, we discussed the rise in social unrest across the globe as nations start to split apart. This has got much worse since then and it appears to have become generalised as the cleavage between populations has now spread to families. Why now and how will it all end?