In “Howay the Ladds” we are focusing on terminology and how we look at investments (with a focus on ESG). We were hoping to find a great quote on ESG but then found there were several hundred different meanings!

We thought this quote from Charlie Munger was probably a good starting point.

“Those who keep learning will keep rising in life.”

March Spotlight

We recently had a meeting with Fundpath. They act as a gateway between us and fund managers. The idea is that we outline how we select funds and what we are looking for, and then fund managers provide us with the information we need.

Simple! Well.

As we were answering the questions it became clear that fund selection is seen as black or white. This highlighted to us how our process is different and how the research tools are relatively poor.

To expand further. The industry is fantastic with buzz words. The latest term we have talked about is ESG. We can debate what this is but essentially it is a quality screen that looks across environmental, social and governance issues.

This is where the problem seems to lie. We completed a survey for the FCA and one of the questions asked was whether there was anything we thought could be a problem in the future. We stated ESG. The reason is because everyone has a different view of what this is. It is however clear that a lot of people assume ESG is some form of exclusionary investment. This is not the case.

In the mainstream portfolios almost all the fund managers have an ESG quality screen, but they are not exclusionary funds and therefore we may have strategies that invest in companies within the oil sector, mining, tobacco, arms etc. The choice is down to the manager and their view of what quality is.

In Europe they have “simplified” the system by having Article 6, 8 and 9 funds. Article 9 funds are the most impactful funds. It is however unclear whether an Article 8 could hold an oil company. The good news is that the UK are introducing their own traffic light system.

We discussed this with a fund manager and asked whether this included exclusions and the answer was no, although they are campaigning for this to be added.

The point with this and everything we do is that nothing is clear cut. On average we hold funds for five years and seek out fund managers who are doing something intuitive. We are looking for consistency and a strategy that we understand because we know that it is almost impossible to be the best fund manager all the time, but the focus is on what they can deliver over the longer term.

Screening tools, and our need to pigeon hole investments into certain categories, mean that we can miss the story. Fundpath is good, and those we have spoken to really rate the system, but it does highlight how we want to automate what we do, and in doing that we miss out on the opportunities that exist.

Some of our best opportunities have come out of us taking data and looking at anomalies. For example, we found an emerging market strategy that had a dreadful track record and then had one brilliant year. We met the fund manager and discovered he had re-organised the fund and this was reflected in the 12-months performance. We held that strategy for five years until the manager retired and it was a great investment for us. No tools would have told us that.

Understanding is also crucial; we hear so many times that ESG funds underperform. The reality is that almost all the fund managers we use in the mainstream portfolios have an ESG screen. They don’t all have exclusions, and they perform well. The impact portfolio which we launched in 2014 has performed as well as the mainstream portfolios.

I love puzzles. When I start out it is hard to see the end picture and therefore patience is required to find the right pieces. Sometimes a piece goes in the wrong place and changes the direction of the picture. Finding investments is the same for us.

The tools provide the overall picture but they don’t give you the whole story. Labels and ratings are often not helpful. It is ultimately about digging around until we find what we want. We worry that investors will discover that the “ESG” fund they have selected is not what they think, and ultimately, we are trying to really understand an investment before we commit to it. Sometimes we can follow an investment for years before we invest. So, to summarise, whatever badge we place on an investment, care needs to be taken to really understand what we are looking to invest in and no tool can do that effectively.

Tracking the market

The markets have pulled back from their highs this year. The European, UK and Japanese markets have done well but it is important to reflect that with all the concerns of the markets “overheating”, many are still below the highs at the start of 2022.

 1 January 20221 January 202328 February 2023Increase
Bitcoin USD47,686.8116,625.5123,147.35+39.23%
Crude Oil76.0880.5777.05-4.37%
S&P 5004,796.563,853.293,970.15+3.03%
Stoxx Index489.99430.01461.11+7.23%
FTSE 1007,505.207,451.707,876.30+5.70%
Hang Seng23,374.7519,570.4319,785.94+1.10%
Nikkei 22529,301.7925,834.9327,445.56+6.23%

Sources of data: CNBC, Yahoo Finance & Reuters

What is in and what is out?

The make up of the top ten has started to shift, with a mix of European and Bond funds coming in. Only two energy funds are in the top ten. The top three funds are iShares MSCI Turkey UCITS ETF GBP +92.8%, HSBC MSCI Turkey NAV GBP +92.2% and Lyxor EEURO STOXX Banks (DR) UCITS ETF Acc +49.3%

At the bottom there remains a diverse mix including index linked bond strategies. The bottom three are HAN ETC Group Digital Assets & Blockchain Equity UCITS ETF Acc USD -58.6%, LF Equity Income Fund -45.8% and HAN Global Online Retail UCITS ETF USD -42.5%.

The most recent data is from December, so we don’t have flows for money in January.

We have kept in the charts below as they provide a good analysis of looking at the past when thinking about the future.

Sources of data: TrustNet, Investment Association

Talking shop with fund managers

We have added all the recent fund manager meetings to the website.

As part of this we have included an update on Home REIT, following a discussion with the company employed to deliver a solution moving forward.

One of the key areas for focus for us this year has been on fixed income. Fixed income is debt, whether government or corporate. It has been an area we have had little exposure to in the past. Last year fixed income had some of its worst recorded performance meaning that there were really no safe areas for investment.

In the rebalance we are increasing exposure to fixed income and many of the meetings cover discussions with fund managers. This has been fascinating and ties in with our thoughts at the start.

We don’t want to second guess what part of the bond market will do well and therefore we are looking to hand that decision over to the fund manager. These strategies tend to be called strategic bond funds.

In theory, these would all be similar, the manger selecting the best assets globally. What we have found is that no fund is the same. Some have more exposure to company debt, some have no exposure to emerging markets, some carry a lot of volatility and so are close to equity funds etc.

What we have managed to do is find three strategies that we think will blend well and more details will be sent in May. Ultimately, the way we have done this is by meeting managers and digging down to discover what we think are the best strategies for what we are looking to achieve.

General disclaimer: The data has been sourced from external sources and although we have looked to ensure this is as accurate as possible, we are not responsible for data they supply. The introduction piece is written in a personal capacity and reflects the view of the author, it does not necessarily reflect the views of LWM Consultants. Equally the views under talking shop are those of individual fund managers. Individuals wishing to buy any product or service because of this blog must seek advice or carry out their own research before making any decision. The author will not be held liable for decisions made because of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.