It is a couple of months since I wrote the last update. The summer is a time to refresh and reset. In the last update we talked about ESG, this time we want to look at being different! The main premise is that we don’t have to follow what everyone else is doing.
Should we care?
As an industry it seems we are being pushed into promoting “sustainable” investing and this has created a lot of confusion. We recently had a discussion at LWM about the mainstream portfolios and this lead us down another path.
In this piece we want to share some thoughts about investing and how themes / trends are often adopted into our portfolios.
When we started investing in 2009, we decided that we didn’t want any direct investment into bonds (debt). This was radical at the time as “modern portfolio theory” states that all portfolios should have an element of bonds and equities. Only now in 2022 is there finally a discussion within the industry on whether “modern portfolio theory” should change! The change is towards alternatives (infrastructure, property etc) which is something we have adopted for a few years. Perhaps we were a little early, but we do believe our decision has benefited the portfolios since we launched them.
More recently we considered where the world was going, and how China will at some point overtake the US. China is like marmite, but the reality is that it is perhaps the only global economy. The timing of decisions by the Chinese Government is questionable but some of the changes they have made are ones no doubt economies in the west would love to make. So, we have a direct position in China. This has been volatile since we made it but ultimately we must look long term. We suspect at some point in the future asset allocators will make China a single country allocation, but it hasn’t happened yet!
So, where is this leading? In the last portfolio review we indicated that we would start to move away from pure tech funds to “new tech”. This will happen over a couple of years. The logic is this. Pure tech was right ten years ago, and even probably a couple of years ago. However, the world has evolved. Many of the holdings can be found in regional strategies and therefore tech funds don’t really offer a point of difference. However, technology which provides solutions to society and the world is emerging and therefore investing in this area is a good replacement long term.
This then leads to our recent discussion about what is on offer to investors. My thoughts have evolved overtime. To get to a “perfect” world we need metals, oil, gas, coal etc. If we switch all that off today, then we get nowhere. Investors have a choice and we are starting to see there is no purely right or wrong route!
If investors want to exclude arms, fossil fuels etc then of course a portfolio like our positive impact portfolio offers that solution. However, a big consideration is what happens if everything becomes exclusionary?
If no-one invests in fossil fuels or mining then these companies will go private and could become state run. That state might not be in a country where the extraction is happening. If we take that one step further, what control do we have over those companies in the future? So this then leads to the rub. Our mainstream portfolios may have holdings in fossil fuels and mining, and that is not necessarily a bad thing. What we must establish is what engagement there is with the companies they invest in.
Ultimately there must be a balance between helping move to a more sustainable world and the use of the resources we already have. In a perfect world we will see the reliance on fossil fuels fall, but this will take time.
So, should we care? We all want the best returns and so we should care that the companies we are investing in are doing the right things. One of the projects we are going to work on over the next 12-months is to establish which of the funds in the mainstream portfolios invest in natural resources, and then what level of engagement the fund managers have. The reason for this is simple: these areas need engagement and if they do the right things these could be fantastic investments. We are also exploring a direct natural resources investment, but the engagement question will be key.
For investors it doesn’t have to be either / or (of course it can be if they want!). Investors can mix and match. There is no reason why the investment isn’t spread between exclusion and engagement. Effectively, the engagement part of the piece will drive the exclusionary part. If we want wind, solar etc, we will get there, but we need oil and gas as we transition.
In conclusion, in meetings and in blogs we talk about this “new world”. As managers of money we are not scared to be different if we believe we can deliver long term returns. As indicated, we adopted an alternative bucket of investments to work alongside equities before many others, and although there could be some debate around China, we remain convinced this will be a good investment and at some point it will become mainstream. “Sustainable” investing is not so clear cut but we believe the work we need to do is twofold. Firstly consider whether there is a good natural resource strategy available, and secondly identify the funds that invest in fossil fuels and mines and then establish what level of engagement they have.
Whilst the world is fixated on “ESG” and exclusions, we want to break away from this and focus on engagement. If we get this right, we suspect this could be another strong source of returns and again makes us stand out from the crowd. We want our clients to engage and this topic will come up in the annual reviews, but the choice is clearly not as a clear cut as we are being led to believe!
Tracking the market
From around mid-June we saw a recovery in markets. However this confidence has drifted over the last few days to the end of August.
|1 January 2022||31 August 2022||Increase|
Sources of data: CNBC, Yahoo Finance & Reuters
What is in, and what is out?
All the top ten funds over 12 months are commodity based. The top three are:
iShares S&P 500 Energy Sector +108.70%
iShares Oil and Gas Exploration and Production +107.80%
Xtrackers MSCI USA Energy +106.40%
The bottom ten is a mix of internet-based strategies, emerging markets, and US. The bottom three are:
Schroder ISF Emerging Europe -71.66%
HAN Global Online Retail -66.60%
Liontrust Russia Fund -53.60%.
The most recent data on fund movements from the Investment Association is up to the end of June 2022. Some of the inflows included:
China / Greater China +£41 million
Global Equity Income +£189 million
North America +£55 million
Infrastructure +£99 million
Some of the main outflows of money included:
Asia Pacific excluding Japan -£328 million
Europe excluding UK -£422 million
Global Emerging Markets – £451 million
Global -£738 million
UK All Companies -£556 million
The chart below shows that net sales in the UK continues to be negative this year as investors remain nervous:
Sources of data: TrustNet and Investment Association
Talking shop with fund managers
August has been relatively quiet in terms of fund manager meetings. We thought we would focus on some interesting thoughts from JP Morgan on China.
Focusing on the here and now, worries include weaker economic data, zero COVID policy and property market.
Longer term picture:
- China is now the second largest economy in the world, and it will overtake the US
- Markets are down 50% from their peak and credit growth is showing signs of bottoming. We are near to the worst of it and most of the bad news is already priced into the markets
- The property market is not the same as the west and is more controlled. There are things happening in the background which are not reported and it is unlikely the Government will allow a banking failure
- When we consider Taiwan, points to consider are:
- On the ground in Taiwan the general thought is why worry about something that has a 1% chance of happening?
- Any sanctions on China would impact the global economy because China is involved in every aspect of our lives (this is not the same as Russia and is a massive consideration)
- China is focused on two aspects, stability for its people and for its ruling party. Any attack would destabilize this and impact the status quo
- It isn’t that JP Morgan don’t rule out an attack, but the probability is very low. As investors, Taiwan is not a reason not to invest in the world’s second largest economy, but it needs to be sized according to the potential risk / reward
- China is crucial to many aspects of our world economy. In terms of decarbonisation, in 2021 they made up 84% of the global solar panel manufacturing
The point from JP Morgan is that there are negatives. There are risks but we shouldn’t assume China is the same as Russia. China is too integrated into the global market and the likelihood of an invasion is small.
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 view on markets 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.