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)
"The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life" - Theodore Roosevelt.
As we discussed last week, professional investors (a very loose term), are remaining bearish on US equities, but they are by no means alone. In this market cycle, far from becoming euphoric, investors are becoming ever more concerned/worried/anxious as prices rise higher. It IS an unusual state of affairs and heightened by the financial media's constant doom-laden headlines; sometimes it appears that investors won't fully relax until there's a crash!
"If there must be madness, something may be said for having it on a heroic scale" - J.K Galbraith (The Great Crash of 1929).
There has been plenty of negative news over the last few months and an even bigger list of issues over the last year or so, but (US) markets appear blithely unconcerned; despite the litany of calls for a decline, (or a crash), nothing appears to dent sentiment and the buying continues.
One of the major problems Advisors (and ourselves) face is the expectations of clients. Fuelled by the relentless media focus on outsized gains in some individual assets, (mostly equities), investors imagine that these gains are easily made and thus they should get involved too. The fact is that they are abnormal (or they would not be news at all), but that is not what the media imply. Of course, fund managers are happy to play along, as they judge that this increases the interest in their products and this article contributes to this phenomenon, with the fund manager telling us that Inflation plus 5% is a "realistic and achievable goal". The chart below does not break down the asset class exposure, but it can be found here.
Hubris is interesting because you get people who are often very clever, very powerful, have achieved great things, and then something goes wrong - they just don't know when to stop - Margaret MacMillan (Canadian historian and Oxford University Professor).
[The following analysis focusses on equities for the sake of brevity, but the points made are equally relevant to Bond Index funds and ETFs].
“Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” – Benjamin Graham.
“It is not the strongest or the most intelligent who will survive, but those who can best manage change.” ― Leon C. Megginson (Business Professor 1991-2010).
The price war between asset managers has been fierce in recent years but has been more aggressively fought in the passive arena- as this article noted late last year, Active fees have fallen by less than those of Passive funds, despite starting from a higher base. Like an eye-witness to a major catastrophe, the Active managers appear to be in a state of numbed incomprehension, unable to process what is happening to them. Meanwhile "feemageddon" as it has been dubbed, rolls on relentlessly; Passive funds have taken huge bites out of Active Manager's assets, as investors wise up to the cost (as well as the returns) differentials.
“Buy not on optimism. Buy on arithmetic” - Benjamin Graham
Analysts and fund managers rarely agree, but on one thing they are united; the UK stock market is cheap, at least in relative terms. Since the Brexit Referendum, the UK All Share Index has lagged the World (ex-UK) by over 6 percentage points per annum on an annual basis and now stands on a Dividend Yield of 4.22% (as of 17th May) and a Price Earning Ratio of 16.05x compared to 2.32% and 18.63x for the World ex-UK Index. There has been a flurry of articles proclaiming that the UK share market is cheap,, with a JP Morgan fund manager declaring that they have not been this cheap since World War One! The charts below show the damage wrought since the Brexit result.
"We have to work towards free trade because otherwise we will miss out on many opportunities for cooperation, and relations amongst countries will become much more difficult" - Lee Hsien Loong (Prime Minister of Singapore).
With the S&P 500 Index having just touched all-time highs and Donald Trump deciding that now is a good time to demand a cut in interest rates by 1% and to re-start QE, contrasting their timidity with that of the Chinese Central Bank, averring that the US economy would go up "like a rocket" if they followed his advice. This would appear to be akin to fighting a fire with gasoline, but that doesn't mean the Fed won't do it anyway, (though not this week it seems!)
Outside of US markets, however, things are not quite so rosy, as indicated by the fact that the MSCI World Index ex-US Index is nearly 11% below its highs (reached in January 2018), and nearly 20% below its 2007 highs, indicating that, once again, the US is leading the charge higher.
China has become an increasingly important player in the Global economy in recent years. As the economy has grown, its effect on world liquidity has also expanded. In the middle of February, the Bank of China announced that "Total Social Financing" (a metric that includes Renminbi loans to the real economy as well as Shadow Banking credit growth), exploded by a factor of three, to 4.64 trillion Yuan ($685 billion). The amount of outstanding loans in the Chinese financial system is now $30 trillion, more than double the GDP of that country. This has more than offset the declines seen in 2018, suggesting that the Government has once more opened the credit spigot, possibly in response to the economic slowdown caused by the on-going US/China trade dispute.
This guy goes to a psychiatrist and says, “Doc, my brother’s crazy; he thinks he’s a chicken.” And the doctor says, “Well, why don’t you turn him in?” The guy says, “I would, but I need the eggs.” - Woody Allen (Annie Hall).
A robot walks into a bar and takes a seat. The bartender says, “We don’t serve robots.”
The robot replies, “Someday – soon – you will.”
One only has to watch financial TV for a few minutes to hear some pundit or other lower their voice and intone sagely, that "markets hate uncertainty". But when exactly was anything about markets NOT uncertain? What the speaker is actually saying is that market participants hate losses, (which is why they were so keen to see the Fed bail them out in 2008-09, a habit that both parties have since found hard to break).
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact" - Warren Buffett.
In recent years, the role of the Chief Executive has become increasingly high profile. They are widely recognised (at least in the media) and feted as veritable supermen, taking a firm by the scruff of the neck and leading them to greater glory. They are interviewed by business media with a reverence that borders on awe and they wield a great deal of influence on governments - the near-universal belief in their judgment on the part of MPs, for example, may help to explain why the latter are (mostly) against Brexit. A "loss of confidence" is often a precursor to an economic slowdown (and job cuts), which may also justify parliamentarians' attentiveness.