It’s important not to generalise from the specific.
It’s been a difficult time for many global assets so far this year, as valuations clearly demonstrate, yet the perception is that the markets are performing well. The FTSE 100 being the shining light.
As I alluded to last week, the FTSE 100 is a concentrated basket of stocks, one which has largely underperformed the main global indices in recent years. It has a proliferation of property, commodities/mining companies, energy and financial stocks. At the moment, some of these assets are performing well but the FTSE 100 is invariably characterised by significant price swings and is an unreliable indicator of what is happening across the broader market.
Furthermore, a chat with Phoebe Stone from LGT Vestra on this very subject led to us discussing how the UK now only accounts for less than a 5% weighting in the MSCI World index. A few years ago, the UK had a double-digit weighting. Sadly, on the world stage, our impact is diminishing.
It’s also important to understand that the FTSE 100 is not a reflection of the UK economy. Whilst companies are listed on the UK exchange, their reach is global with circa 75% of the earnings generated away from UK shores.
Weighing Up Our Options
Monetary policy is changing, and it will have implications for the investment markets. However, we feel it is important not to be too hasty as we expect a series of mini cycles and rotations, in and out of favour for certain assets. On saying this we have always wanted to catch momentum and at our quarterly investment meeting in two weeks’ time we are likely to make some changes to our portfolios.
Goldman Sachs last week suggested that now is the time not to panic and we certainly won’t be! The same goes for LGT Vestra who are more likely to transition their holdings as and when opportunities present themselves.
Last week I highlighted what we see as attractive for 2022. However, I think it’s worth summarising the contents of an article in Investment Week quoting the thoughts of the Managing Director of Equity Products at CME Group. In the realms of what we advise upon, Tim McCourt comments:
“The rise of ESG factors within finance has been inspirational. Maturing from an academic consideration to an element in many investment decisions, ESG increasingly influences equity, bond and increasingly commodities markets as evidenced by the launches of more robust index screening and carbon offsets products. While adhering to regulatory change and trying to become more cost efficient, the use of listed derivatives to manage risk and improve returns will become ever more important”.
Obviously, something that resonates with us and reinforces the value of the relationship we have with the likes of LGT Vestra who are adept at managing risk. I met one of their new recruits online this week, her name is Siobhan Archer. Siobhan has joined LGT Vestra as a sustainable investment specialist and will be covering their stewardship activities by voting and engaging with direct equities and fund managers. I have spoken before about how the investment management arena can be part of the solution and Siobhan has been employed to enhance the impact LGT Vestra can have on driving positive change in the sustainable space.
Making an Impact
We’ve spoken before about the rise of impact investing. This is a step beyond just complying with ESG criteria, it is where money is focused on making a positive difference.
Much has been written about the ‘E’ in ESG but let’s talk more about the ‘S’. Siobhan sent me this information during the week.
What are Social Bonds?
Social Bonds are any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance new and/or existing Social Projects.
Social Bonds are a newer member of the sustainable bonds family, with the first formal Social Bond being issued in January of 2015 by the Spanish Instituto de Credito (Spanish Credit Institute) with the goal to help finance SMEs (small to medium sized enterprises) in economically depressed regions of Spain.
The bond offered loans at favourable rates and terms to attempt to spur employment, and companies deemed unsustainable were excluded from the loans. The results were extremely successful attracting a wide range of investors including in Asia, Middle East, Germany and other European buyers.
Social Project categories include, but are not limited to, providing, and promoting:
- Affordable basic infrastructure (e.g. clean water, sewers, sanitation, transport, energy)
- Access to essential services (e.g. healthcare, education and training and financial services)
- Affordable housing
- Employment generation and programmes designed to prevent/alleviate unemployment
- Food security and sustainable food systems (e.g. access to safe and nutritious food)
- Socioeconomic advancement and empowerment
How does a Social Bond work to deliver returns for investors?
In the same way conventional or green bonds act as loans from an investor to a borrower, to fund a specific project, Social Bonds will look to fund a specific Social Project. The investor will receive interest on their investment, as well as the original amount loaned to be returned by a certain date determined at the issuance of the loan. Whilst default risk and inflation risk tend to be the main factors which affect bonds delivering on their promises, Social Bonds tend to be less affected by changes in interest rates or market risk because the return depends entirely on a social outcome being achieved.
How are Social Bonds aligned to LGT Vestra’s Sustainable Strategy?
|