Please find below our interim Investment Market Update as at 20th August 2021.
Blue Sky Investment Market Update
Historic shift towards Sustainability
In an article published in Investment Week, it was reported that the Exchange Traded Fund (ETF) market has reached a green milestone as 50% of total flows, year to date, has headed towards Environmental and Social Governance (ESG) funds. This is according to data from Trackinsight.
This is extremely encouraging as it reinforces our long-held stance that investing into ESG funds is most certainly not a fad! In our Investment Committee’s opinion, we are experiencing a cultural shift in thinking, helped by improved regulation, greater transparency, and awareness.
Make no mistake, Sustainability will soon be the norm.
Some numbers for you…
European ETFs are leading the way. Of the $130 billion of total inflows into European ETFs so far this year, $65.6 billion has been directed towards passive products with an ESG strategy or theme. This compares to just 6% of total flows in the US and 8% of Asia Pacific.
According to Ailing Zhang, ESG/ETF analyst at Trackinsight, Europe is leading the way in ESG engagement with recent wildfires catching the attention and change being promised by respective governments.
The numbers were even better in July
According to Calastone, the global flows network, as reported in FT Adviser, momentum has been amplified with 90%, yes 90%, of equity fund inflows in July being invested in ESG funds.
The data showed investors were starting to fine tune their ESG investments, as ESG equity funds with a targeted geographical or sector focus made up a greater share of inflows.
A breakdown of the data shows that £1 in every £12 invested into overall ESG fund inflows were directed towards the UK. Clear evidence of changing attitudes.
A game changer
ESG sector inflows, according to the Head of Global Markets at Calastone stated that, so far this year ESG has amounted to 66% of all their cumulative inflows since 2015. “ESG funds have proven to be a real game changer. What’s more, is that of late, sustainable investment funds have proved to be resilient when the wider market experiences volatility”.
We have always believed an active approach was prudent when investing into ESG. It would appear that many believe the same. Last month according to FT Adviser, a portfolio manager at Schroder’s said investors looking to gain exposure to thematic funds should consider an active approach. We couldn’t agree more.
The fund manager, Alex Monk of the Schroder Global Energy Transition Fund, gave reasons as to why an active approach to thematic investing added value and particularly stated “when you consider passive indexes today, they offer either imbalanced or incomplete exposure to a theme”. This is something which we have evidenced at Blue Sky. The passives tend to be concentrated around specific sub sectors which can lead to a concentration risk, something we often see around technology companies.
The debate goes on!
We frequently hear the debate about whether one should invest in passive or active funds. The thinking is that passive funds deliver better value. What is often ignored is how the end user feels when indices become volatile. The pandemic highlighted the difference an active fund manager can deliver. Of course, there are differing degrees of active!
At Blue Sky, we pick and choose our combinations to help lower costs, to optimise returns and protect on the downside. With regards to ESG however, our feet are firmly planted in the active space. The market is complex, and we need to ensure that we are diversifying across the ESG spectrum.
This week’s other news…
US consumer confidence weakens
US retail sales dropped last month as a resurgence of Covid-19 contributed to a pull-back in spending. The decline was deeper than expected.
Apparently, behind the data, sentiment amongst Americans has weakened over concerns of the pandemic and its possible impact on household finances. According to the University of Michigan, consumer sentiment fell to its worst level in more than nine years, according to FT.com.
It’s another story in the UK as job vacancies reach record highs
Again in FT.com, it was reported that job vacancies in the UK have reached a record high as the labour market rebounded from the effects of the pandemic, with growth in recruitment surpassing economists’ expectations in the three months to June.
The number of people in employment rose to 32.28 million in the second quarter, up 95,000 from January to May, the Office for National Statistics said on Tuesday. The jump in recruitment beat the 75,000 forecasts by experts polled by Reuters and marked the strongest quarter of growth since Covid-19 restrictions were first imposed. The increase pushed the headline unemployment rate down to 4.7%.
Good news creates market jitters
As we have reported before, this was always going to happen. The catalyst was the minutes from the Federal Reserve’s July policy meeting which indicated a majority of policymakers were prepared to begin easing the central bank’s vast stimulus programmes later this year.
This news spooked equity markets and commodities this week. Noises are being made about tapering stimulus in a more aggressive way than was previously anticipated. Of course, on the one hand its good news as the US is coming out of crisis mode, on the other there is nervousness as recent data suggests slowing global growth. Not helped by the difficulties in containing the Coronavirus and weak supply chains. Recently we also warned of China’s slowing growth.
Peter Schaffrik, the global macro strategist at RBC Capital Markets was quoted in FT.com; “the economic backdrop isn’t bad, but I don’t think we’ve had ‘the all clear’. Growth is going to slow down in the second half of the year even before you consider the possible impacts of the Delta variant.”
Reasons to be grateful
Dominating the general news has been the civil war in Afghanistan and the resurgence of the Taliban. Desperately sad for so many people, and one can only hope that the atrocities associated with the Taliban are not repeated once again.
A colleague said to me yesterday “it’s a reminder of how much we should be grateful for living in this country. It’s important we don’t ever take things for granted”.
Dare I add… just like our environment!
Have a great weekend.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.