Twenty20 Investments - iBasket

11. October 2015 15:50
by Allan

Are you missing out on the benefits of Socially Responsible ETFs?

11. October 2015 15:50 by Allan | 0 Comments

Like most things in life, overnight success often takes ten or more years to come to fruition, and so it is with Socially Responsible Investing, SRI. Figures published in 2014 by the Forum for Sustainable and Responsible Investment, a US association comprising institutions and organizations, suggest an estimated $6.57 trillion of assets in the US tracking SRI strategies.



Screening on Social, Environmental and Corporate Governance

Hardly a drop in the ocean as this accounts for more than one sixth of all assets held by professional managers in the US. No wonder there has been a push by MSCI into this space with their ESG, Environmental Social Governance, family of indices. This in turn has seen UBS throw their hat in the ring as their ETF division partnered with MSCI to benchmark their products.

The methodology by which each index provider has designed their SRI screening of companies on one level can be nuanced, but on another is very straight forward to understand: if as a company you are not acting in a socially and environmentally-friendly manner, you are not allowed in as your name is not on the list! Interestingly, none of the MSCI indices includes Volkswagen, but to get a flavour, just look at the top 5 holdings of the ETF providing exposure to the UK large cap sector and this includes Astra Zeneca, GlaxoSmithKline, Reckitt Benckiser, Vodafone and Prudential.

The MSCI SRI equity indices are re-balanced quarterly and comprise those companies with a ‘Best-In-Class’ ESG rating and who are not involved in the following industries; Military Weapons, Nuclear Power, Adult Entertainment, Tobacco, Alcohol, Civilian Firearms, GMOs and Gambling. The weightings of each constituent match the sector and regional weighting of the parent MSCI ACWI index, thus avoiding any unnecessary systematic risk introduced by the SRI filtering process. The ESG rating framework itself is very rigorous, scoring a company on a scale from AAA to CCC, with 37 key issues monitored on an annual basis contributing to the rating. Other screening processes, like for the iShares Sustainability ETFs, work on a similar basis.

The history of socially responsible investing in the UK can be traced back to the FTSE4Good set of indices which were launched in 2001, but it wasn’t until early 2011 that the first SRI ETF was listed on the London Stock Exchange, the iShares Dow Jones Europe Sustainability Screened UCITS ETF. With a family of six ETFs tracking the MSCI Socially Responsible indices, UBS is the clear market leader. More recently they have listed a corporate bond ETF with SRI screening, the UBS Barclays MSCI US Liquid Corporates Sustainable UCITS ETF, (Bloomberg Ticker UC98), which is very welcome as this offers the opportunity to implement a diversified SRI portfolio solution using ETFs.

ETFs with SRI screening

Source: Twenty20 Investments, as of 11 October 2015

There are two reasons why an investor might want to get exposure to SRI. The first is the obvious one, it hopefully makes us feel good to invest in ‘good’ companies. The other belief is that companies are included in the index because it is deemed that displaying attributes of good corporate governance, and social and environmental responsibility are good drivers of long term investment returns, and yes I do personally believe that as well. Looking at the ESG-screened MSCI UK equities index, as of 30 September 2015, the one year net index performance reported by MSCI is 2.2% compared to that of the standard MSCI UK index which was down 5.9% during the same period. A nice surprise indeed, but please do not expect this kind of outperformance all the time.

It strikes me that the whole SRI story could easily become re-enforcing as the finance services industry continues to shore up its reputation. With an ever growing number of institutional investors increasing their allocation to SRI benchmarked strategies, on a ‘sticky money’ basis alone, it is time to pay attention.

17. September 2015 14:50
by Allan

Is it time to re-consider Emerging Market equities?

17. September 2015 14:50 by Allan | 0 Comments

For quite some time now the process of building a multi-asset portfolio has become an increasingly difficult task. For most of the last five years the returns from commodities have been best avoided. And allocating to Fixed Income has not been without its problems either. For example in February, UK gilts and inflation-linked bonds were both down in the region of 5%, hardly what you expect from a ‘low’ risk asset. As for investing in Emerging Markets Equities, with the exception of Eastern Europe, this has hardly been one of the more enjoyable car crashes of the last 6 years. As ever, what the Lord giveth the Lord taketh away.

With the recent sell-off in EM currencies, the equity markets of many EM countries – from Brazil through to Turkey – have followed suit, resulting in significant losses. This simple fact, coupled with the realization that the days of a zero-rate Fed policy will be soon behind us, suggests a fresh look as to whether Emerging Markets equities now offer a good re-entry point.

Fed Fund Rates versus Emerging Markets

Looking at the big picture, it is quite interesting to see the impact of the Fed’s policy over the last ten years by comparing the Fed Fund Target Rate with the MSCI Emerging Markets Index. The chart suggests the Fed’s zero-rates policy has not been kind to Emerging Markets stocks.

Fed Fund Target Rate vs. MSCI Emerging Markets Index, source: Bloomberg, 16 September 2015.

It is tempting to infer that a raise in US interest rates could be one of the catalysts that drives the recovery in Emerging Markets. In the short term this is unlikely to be the case, but looking further out, on a six months or one year horizon, if looking at the rolling one year returns for a number of ETFs is anything to go by, then it does suggest a turnaround might be on the cards.

Emerging Markets Performance

For example, UBS’s ETF which tracks the MSCI Emerging Markets Socially Responsible Index, ticker UC79, shows a very distinctive turning point in the one year rolling return as of late. Likewise, the Amundi MSCI Emerging Markets ETF, shows a similar reversal.

Rolling one year performance for UBS’s MSCI EM Socially Responsible ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

Rolling one year performance for Amundi’s MSCI EM ETF benchmark, source: Twenty20 Investments, Markit, 16 September 2015.

This time it does feel different as the global investor base assesses the dangers that accompany a China stock market where too many stocks are suspended from trading in the markets. For this reason alone the best stance is to stand on the side-lines until this story runs its course, but increasingly it looks like Emerging Markets equities may come back into play.

Thank you for visiting the ETF Managed Portfolios Blog Top