Fund providers have an almost miraculous ability to create products that follow the news cycle. Index-linked funds (due to worries around inflation), robots and automation (robots taking over our jobs) and gender diversity ETFs (tapping in to Sheryl Sandberg’s ‘Lean In’ revolution). Gender diversity, hopefully, will be a lasting focus for investors, while internet-focused funds, which launched in the 1990s and early 2000s, had a seriously rocky start.
No matter an investor’s principles and good intentions, ESG is prone to the same marketing whims and opportunism of fund providers as much as any other investment sector. And just like any other sector, ESG funds are also at risk of being overpriced, especially if a fund provider claims to launch a ‘first of its kind’ and therefore has no competition. ESG or not, a fund provider is a business, and its main aim is to profit.
A pub quiz question- what has been going on for more than 3 years, amid much frustration and bemusement to all involved, having got nowhere at all during that time and is not Brexit?
Just like the debates around active versus passive funds or the definition of smart beta, the concept of environmental, social and governance-focused ETFs is hotly debated.
ESG has come a long way. What started in the 1960s as stripping out tobacco stocks has evolved to other areas like gender equality, green bonds, social impact investing and more. ESG, to a certain extent, has also had to keep abreast of societal changes, removing increasing numbers of stocks and sectors as time goes on, from companies that derive most of their revenue from arms sales to companies that benefit from practices such as child labour.
One could argue that good ESG starts at home, and not just with a product range. As demand and awareness around environmental, social and governance factors grow, ETF providers are under increasing pressure to showcase their own good practices.
Fund houses will also have to become more transparent on ESG, whether they like it or not. By 2020, the European Commission will require investment houses to disclose how they integrate ESG opportunities and risks into their processes to stop funds being labelled as ESG when they normally wouldn’t qualify - otherwise called ‘greenwashing’.
In the context of financial markets, Repo's refer not to repossessions but repurchase agreements. This is the process whereby banks who are (temporarily) short of money can borrow from those who have excess cash so that they stay within their legally required reserve requirements. Generally, the interest rates charged are that of the prevailing Fed funds rate, which s currently in a range of 1.75-2%.
Under the ESG umbrella, there is another category that pertains more to the ‘S’ and ‘G’ letters – gender equality.
Given the rise of movements like MeToo and TimesUp, there is increased recognition and acceptance of gender equality and diversity at work. And thanks to UK government-backed initiatives like the Women in Finance charter, the Alexander Hampton review, which aims for 33% women on boards of all FTSE 350 companies by 2020, as well as mandatory gender pay gap reporting for companies with more than 250 employees, gender equality has become less an esoteric aim and more mainstream.
Equities can be seen as a "call option"on the future growth of a company; once the liabilities due to bondholders are paid, the surplus accrues to shareholders in the form of dividends/share buybacks, etc. or are re-invested to generate future growth in the firm. At least, this is what happens most of the time, but every now and then, things go awry, a company fails and the "call option" expires worthless. It is not a common occurrence, but when it does happen, the shareholders tend to lose everything.
It is usually the case that any innovation or evolution in the ETF industry benefits equities first. Equity ETFs have launched in every category, from the smallest corners of the globe in terms of geography to smart beta and beyond. Fixed income and other asset classes, on the other hand, always take longer to achieve the same level of progress.
ESG is no exception. Data from Morningstar as of July this year shows the vast bulk of assets and number of funds relating to ESG investment in Europe is in equities. In fact, there are only eight so-called sustainable bond ETFs in the region. There are currently only three providers offering these fixed income funds - db x-trackers, iShares and UBS, and their products are mostly invested in corporate bonds.
"If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful" - Michael Porter.
In the last fortnight, there has been something of a reversal in the market's favorite Factor trade - long Growth/Momentum and short Value. It began in the US, but as is normally the case, it soon went Global. As a result of this, months of gains in Momentum (long) and Value (short) were lost in a matter of days.
But one would not have known anything of this, looking at the Indices, with all major markets seeing gains since the start of September.
One of the most persistent myths around ETFs that are focused on environmental, social and governance (ESG) factors is that investors will have to pay a premium for green exposure.
Last time, we debunked the myth that the ‘premium’ in question would be sacrificing returns. This time, let’s look at the other more common use of the word ‘premium’ – that is annual fees.
As most investors who are interested in ETFs know, there has long been a race to the bottom on annual charges. While most actively managed funds have the audacity to hover between 0.75% and 1% per year, depending on the asset class and strategy, ETFs have been falling as if there is no gravity. Investors can pick up an entire portfolio for just a couple of basis points – and as US publication ETF.com discovers every year, the price just gets lower (it hit 0.05% in 2017).
The following blog was produced by Garrett Quigley of GSI (Global Systematic Investors LLP). GSI are the appointed sub-distributor for the Global Sustainable Value fund which EBI will be using in it's Earth portfolio suite. You may wish to view former EBI blogs on the Value premium both here and here.
• In global developed equity markets, Growth has outperformed Value for a protracted period.
• Growth is now trading at a historically high price level relative to Value.
• Much of the recent outperformance of Growth vs Value is due to the change in the valuation spread between Growth and Value.
• When Growth last traded at this valuation level, it subsequently underperformed Value for 20 years.
"If you gaze long enough into an abyss, the abyss will gaze back into you" - Friedrich Nietzsche.
Amidst the sound and fury of trade war rhetoric, there are signs of problems in the banking system in China. In the last 3 months, there has been a spate of previously unknown events there - bank defaults. This week's news of a delay in the implementation of (some of) the US tariffs on Chinese goods led to an immediate spike higher in shares (and lower in bonds) but has not changed the situation that has plagued the Chinese banks.
Investing with a focus on environmental, social and governance (ESG) factors has been around since the 1960s, yet almost 60 years on, myths about ESG investment abound.
We are working our way through these myths. Last time, we looked at the claim that “there is no demand” for ESG - the numbers we gathered prove otherwise. Today, we’re tackling the arguably most persistent myth - that ESG investing negatively impacts performance.
There is of course a degree of truth here. The majority of ESG assets are in funds that employ ‘negative screening’ or ‘negative filters’ - a basic approach that essentially removes any stock or sector that is not deemed fit for an ESG-focused fund, like tobacco or alcohol. If the removed sector performs well, the ESG fund will inevitably lag behind.
"Whatever hysteria exists is inflamed by mystery, suspicion and secrecy. Hard and exact facts will cool it"- Elia Kazan (Broadway and Hollywood Director).
We last wrote about the US Yield Curve at the end of March this year, but since then, speculation about it appears to have run rampant. Markets now seem certain of a recession, with timing the only bone of contention. As a consequence, the world is now awash in bonds that have negative yields, ($16.7 trillion, as per Bloomberg chart below), meaning that investors are paying issuers to own their bonds. On the face of it, this makes absolutely no economic sense whatsoever.
As of early August, European government bond yields were deep in negative territory, with UK Gilts not too far behind. This week, (16/08) 10-year Gilts were yielding the princely sum of 0.45% per year.
There is no doubt that there is a growing interest in environmental, social and governance (ESG) investments, including in the passive fund space. Whether it’s documentaries such as Blue Planet, or the politics around the Paris Agreement on climate change, the Extinction Rebellion protests or 16-year-old schoolgirl Greta Thumberg sailing on an eco-friendly yacht to speak at the next UN summit in New York, public consciousness has awakened to the very real threats facing our world. Investors want to make ‘green’ decisions, because they are realising their cash can make a difference and give them a voice - whether that’s relating to the company’s carbon footprint, executive pay schemes or workforce diversity. Interest in this area is growing to the point that institutional investors are not only allocating billions of pounds to ESG solutions, but they are even choosing ESG-themed portfolios as a default. Recent examples include the £11 billion Co-op pension scheme choosing a Futu…
The phrase above dates back from John Maynard Keynes’ book, “A Tract on Monetary Reform” written in 1923. Since then, debate has turned on whether Gold is a store of value or just another commodity. Until recently, however, the debate looked settled; the price has spent nearly a decade going down from a high above $2,000 to around $1,100 in December 2015. Still, the “Gold bugs” kept the faith, continuing to warn of impending disaster (notwithstanding the failure of those disasters to actually happen). In the last few weeks, it appears that they may be getting their day in the sun. Last year, it was among the better performers, losing only around 2% in US Dollar terms and it's up nearly 10% so far in 2019 - many investors are now starting to re-assess their views. Analysts are getting bullish, as indeed are Ce…
“What You Gain On The Swings, You Lose On The Roundabouts.” - Robert Jordan (US Author), from his book "The Path of Daggers".
Angels on the sideline,Baffled and confused.Father blessed them all with reason,And this is what they choose? - Right in Two (Tool).
At the end of January 2018, we highlighted how a number of seemingly contradictory things were happening in US asset markets; shortly thereafter the Dow Jones Index fell around 13% peak to trough in the space of just 5 trading days. We appear to back in twilight zone mode once again - in the last week, both the Dow and the S&P 500 have achieved major Index milestones (27000 and 3000 respectively) and are already heading towards the next "psychological" levels at what appears to be escape velocity.
"Currency Manipulation is what Bertrand Russell called an "emotive conjugation" and Bernard Woolley called an "irregular verb":* I am cutting interest rates* You are trying to achieve a competitive devaluation* He/she/it is manipulating their currency to obtain an unfair advantage". - John Kemp (Analyst)