Portfolio managers Stuart Clark and Bethan Dixon on staying ahead of volatile markets while harnessing ESG demand
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The landscape for investing is changing at a rapid pace. Financial markets are going through a period of increased volatility, while at the same time needing to generate the investment required to support the global sustainable transition.
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As investors contend with unpredictable markets, the traditional rulebook of diversifying returns is evolving. Investors are having to look to new asset classes to find investment opportunities.
At the same time, the investor landscape for sustainable investing is changing. Responsible investment is no longer the small segment it used to be, and investors are looking for products tailored to their specific sustainability goals.
In this guide, Quilter share how they have managed to navigate the current market volatility whilst expanding their portfolios to satisfy the growing demand for responsible investing.
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THE INTERVIEW
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Operating in this challenging environment, portfolio managers Stuart Clark and Bethan Dixon are looking for stability in unstable markets and targeting opportunities across traditional and sustainable segments.
he current investment climate is far from stable. As share prices drop and the uncertainty of an economic slowdown continues, it can be difficult to judge whether the current volatility is reactionary or reflects fundamental shifts in the market.
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Keep calm and stay ahead of volatile markets
Stuart Clark explains that during uncertain periods it is crucial to block out the noise and ask the question – what has fundamentally changed?
“With the speed of daily market movements, you need to keep focused on your views and review whether this leads to a shift in your assessment of the opportunities and risks”, he says.
When investing in volatile markets, it is pivotal to avoid unnecessary risk. Clark admits that WealthSelect’s strong returns in 2021 allowed them to de-risk the portfolios in 2022 and comfortably evaluate opportunities from the right side of the market.
Finding stability
Maintaining strong returns in volatile markets is easier said than done, with investors needing to keep calm and assess the business fundamentals of their portfolios
It is crucial to block out the noise and ask the question – what has fundamentally changed?
“If you’re chasing your tail, it can be harder. We have retained a cautious stance in the portfolios. We haven’t been actively adding risk, with the view that there will be a better opportunity to do that further down the road,” he explains.
Until recently, the WealthSelect portfolios were distinctive in their underweight to traditional fixed-income assets thanks to Clark preferring to diversify into alternative assets and cash.
While his investors have been well-rewarded by this positioning, in late October Clark decided the time was right for an ad hoc rebalance to take advantage of the pricing opportunities that had arisen in government bonds.
As Clark explains, “Fixed-income assets have offered poor diversification for investors in recent years due to the ultra-low interest-rate environment. Following this year’s extreme sell-off in government bonds, we decided it was the right time to add to our holdings in this space.
Re-diversifying
“Using our cash holdings we increased our exposure to global government bonds, across risk levels 3 to 7 in the WealthSelect Managed Active, Managed Blend, Responsible Active, and Responsible Blend portfolios.
“Although, historically, we’ve always been underweight to fixed income, 2022 saw a dramatic shift in policy from central banks to fight rampant inflation,” Clark explains, “and while we don’t expect a sharp reversal in interest rates, central banks will need to ‘pivot’ at some point in the year as inflation recedes and numerous economies face the prospect of recession. This should be when fixed-income assets will begin to shine again.”
“By definition, the bottom of any market is only seen in retrospect and history tells us that when markets rebound it tends to be sudden. This means the biggest risk to investors is not remaining actively invested in markets.
Although the Fed remains ‘hawkish’, the latest figures show that US inflation has taken a major step down. With Russian forces supposedly on the back foot in Ukraine, there’s an increasing likelihood of a negotiated ceasefire, which would ease tensions across Europe.
“The point is that, although the immediate outlook looks relatively bleak, it might only take a morsel or two of good news to reverse investor sentiment and push up equity prices once more,” Clark emphasises.
The pandemic, and the lockdowns that ensued, created far greater scrutiny of how companies behave toward their stakeholders and employees.
Following the invasion of Ukraine, a swathe of the world’s largest companies were quick to sever ties with their Russian operations, despite huge losses. Russia’s actions also added impetus to the attempts to ‘re-shore’ manufacturing and supply chains as well as amplify the requirement for companies and countries to consider the ESG (environmental, social, and governance) profile of their trading partners.
Stuart Clark Portfolio manager, Quilter
Bethan Dixon, Portfolio Manager, Quilter
Seeking opportunities
Meanwhile, the challenging economic and corporate environment will continue to produce winners and losers in equity markets.
As Clark explains, “There are still plenty of companies operating perfectly well and hitting their earnings targets; they’re not seeing revenue cuts and they have strong order books, but the market has marked their stock down by 20% or 30% due to the broader conditions.
“The focus of active management is to minimise losses during downturns and to pick up some of the recovery when markets bounce back. We do this with our asset allocation and specialist managers that identify the appropriate companies” he says.
ESG now centre stage
To meet the growing demands of sustainable investors, Quilter targets thematic opportunities across its new Sustainable portfolios.
One of the key themes in the Sustainable portfolios is energy transition. The war in Ukraine has shone a spotlight on energy security and increased the focus on the urgency of transitioning to renewable energy. This is a key solution to de-carbonise our energy system and will allow domestically produced electricity.
The Sustainable portfolios target several funds in the energy transition theme. One is focused on clean energy and the supply chain, while another targets leaders in de-carbonisation of industrial processes and energy efficiency.
As well as presenting long-term opportunities, investing thematically can provide diversifying benefits. Bethan Dixon highlights the Candriam Oncology Impact Fund as a good example.
“The fund is supporting research and development within the cancer space to help promote good health and quality of life, and also provides one of the lowest correlations to global equities. In addition, we believe the fund provides a compelling investment opportunity and so have added this fund in our new Responsible portfolios as well,” Dixon says.
Crucially, while many view sustainable investing as separate from a traditional approach, this distinction will become increasingly blurred. Clark emphasises that if his team identifies interesting sustainable investment opportunities, nothing stops them from also including these funds in the broader portfolios.
“In a changing landscape, portfolio managers need to be open to new ideas,” Clark says. “Every day you come into work is an opportunity to learn something new.”
That (cancer) fund also provides one of the lowest correlations to global equities, so provides a diversifying return stream in the Sustainable portfolios
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2: ‘ESG: What makes 34…our chosen score?’, blog post, 20 May 2021.
Market cycles | Fund performance | Asset selection Portfolio construction | Measuring sustainability
Atmospheric levels of greenhouse gases, notably that of CO2, have reached levels never-before-seen in Earth’s recent history. Scientists now agree that Man’s actions are a primary cause of this increase and the corresponding rise in global temperatures. The energy sector in particular is the biggest emitter and achieving the Paris Climate Accord’s targets could require significant investment in clean and renewable energy production, primarily hydro, wind, and solar electricity.
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ACCESS TO WATER
A RENEWABLE-POWERED FUTURE
FEEDING THE FUTURE
WealthSelect is a Defaqto 5 Diamond-rated managed portfolio service with a strong performance track record and £10.2bn of assets under management proudly supporting more than 1,900 financial adviser firms and 73,000 investors.*
Over the next 30 years, the Earth will have to feed two billion additional people, most of whom are likely to be consuming more calorie-rich diets. At the same time, the availability of essential basic resources for agriculture, namely land, freshwater, and rural labour, is not increasing. Thus, investment into agricultural production appears set to continue in order to enhance crop yields, particularly new technology such as seeds and precision agriculture which aim to improve farmer profitability, efficiency, and industry sustainability.
Water is a key basic resource, often forgotten in the developed world, but underpinning economic prosperity nonetheless. The growing global population, alongside increased industrialisation and urbanisation, rising incomes and calorie intake, and weather volatility, are putting pressure on the world’s limited water resources. At the same time, the regulatory and societal emphasis on improved wastewater treatment has grown with greater awareness of the impact of water pollution. Investment in water services is likely to continue at a sustained rate to ensure demand can be met as well as compliance with environmental regulations.
A wide range of portfolios to meet investors’ needs
*At least 50% of the assets in the Responsible portfolios will be in funds that pursue explicit environmental and/or social targets or characteristics
Why this theme?
decline in the global weighted average cost of electricity from solar photovoltaics over the decade from 2010 to 2020. Renewable electricity has become the most cost competitive source globally, undercutting coal, gas and nuclear energy.
2
85%
to $5.8trn annual investment needed in energy supply and infrastructure over the next three decades to meet the net zero target (vs. $1.7trn per year today).
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$3.1trn
of global greenhouse gas emissions emanate from the energy sector, including energy used in industry (24%), transport (16%) and buildings (17%).
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73%
Sources: 1. Our World In Data covering 2016 emission, 2020 Report. 2. Irena, 2021. 3. BloombergNEF, 2021
of the world’s arable land has been lost to erosion or pollution in the last 40 years. The projected arable land per capital is expected to decrease to 0.18h (from 0.21ha in 2020). More food will need to be produced with fewer resources.
33%
could be added to global GDP by 2030 through better connectivity in the agriculture industry, including crop and livestock monitoring, autonomous machinery, and drone usage.
$500bn
people will be added to the world’s population between 2020 and 2050, increasing demand for basic necessities, such as food.
2 billion
Sources: 1. United Nations “World Populations Prospects 2019”. 2. University of Sheffield’s Grantham Centre for Sustainable Futures, 2015 and Food and Agriculture Organization of the UN “World agriculture towards 2030/2050: the 2012 revision” 3. McKinsey, 2020
litres of treated water are lost every day in the US due to deteriorating and ageing water pipes while the share of investment in water infrastructure borne by the federal government has fallen from 31% to 4% in four decades.
22 billion
the forecast annual global investment needs in water and sanitation infrastructure between 2016 and 2030.
$900m
people globally could face medium to severe water stress by 2050.
5.7 billion
Sources: 1. UN World Water Development Report, 2018. 2. Report card for America’s infrastructure, 2020. 3. OECD Environmental Outlook to 2050, (2012)
WealthSelect now offers 56 portfolios including Responsible and Sustainable options. The enhanced WealthSelect helps deliver a more personalised investment service to a wider range of investors, by catering for their responsible investment preferences as well as their appetite for risk and preferred investment management style – active, blend, or passive. WealthSelect helps advisers offer tailored advice to more clients and give all investors the complete picture.
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*as at 30 November 2022
The WealthSelect Managed Active 5 portfolio has returned £20,000 more than its IA sector performance comparator
Proven performance since launch in 2014
Source: Quilter Investors as at 30 November 2022. *Return is the total return, percentage growth, net of fees based on £100,000 initial investment of the Managed Active 5 Portfolio and the IA Mixed 20-60% Shares sector average over period 24 February 2014 to 30 November 2022. **Total return, percentage growth rounded to one decimal place. All performance figures are net of underlying fund charges, but gross of the Managed Portfolio Service charge. Deduction of this charge will impact on the performance shown. The WealthSelect Managed Active portfolios launched on 24 February 2014.
The new quarterly reports for our Responsible and Sustainable portfolios are designed to help investors review the ESG and responsible investing credentials of the portfolios, and measure how the portfolios are achieving their objectives.
Quarterly responsible investment reports
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Stuart has been the portfolio manager of the Quilter WealthSelect Managed Portfolio Service since its launch in February 2014. Stuart joined Quilter Investors in 2013 and has more than 20 years’ experience in fund research and portfolio management at organisations including UBS Wealth Management and Julius Baer. Stuart is a Chartered Financial Analyst (CFA) and has a degree in Accounting and Finance from the University of Kent.
Stuart Clark, Portfolio manager
Bethan is a portfolio manager in the multi-asset investment team. Her role involves working with the multi-asset investment team across the portfolio ranges, as well as being an ESG specialist supporting the integration of ESG into the investment process. She joined Quilter Investors in June 2019 from Pyrford International, a subsidiary of the Bank of Montreal, where she spent almost five years working as an equity analyst where she was involved in integrating ESG factors within the investment process. Bethan is a CFA Charterholder and holds a degree in Natural Science, with a major in Physics, from the University of Bath
Bethan Dixon, Portfolio manager
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Follow the Quilter Investors responsible investment principles Maintain a lower carbon footprint than the reference index Focus on investing in funds that Quilter regards as leaders in ESG integration Invest in funds that pursue explicit environmental and/or social targets or characteristics Invest substantially in funds that target positive sustainable outcomes Seek to support sustainable solutions to environmental and social challenges Exclude or normally avoid exposure to unsustainable activities
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Follow the Quilter Investors responsible investment principles Maintain a lower carbon footprint than the reference index Focus on investing in funds that Quilter regards as leaders in ESG integration Invest in funds that pursue explicit environmental and/or social targets or characteristics*
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Follow the Quilter Investors responsible investment principles
Cumulative performance
WealthSelect Managed Active**
IA Mixed 20-60% Shares
-4.9 -3.6 9.7 18.1
YTD 1 year 3 year 5 year
-8.8 -7.7 1.6 7.8
2021 2020 2019 2018 2017
6.3 3.5 12.1 -5.1 7.2
6.4 7.1 12.9 -4.6 8.2
Since launch
54.7
33.9
Discrete calendar year performance
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View our latest responsible investment reports >
How Quilter is breaking down barriers in ESG investing
Dixon: The Sustainable portfolios are designed for investors who want to go further – and actually target positive environmental and social outcomes. They do this by targeting the outcomes of the UN Sustainable Development Goals and excluding or minimising unsustainable activities, such as tobacco production and fossil fuel generation. At the moment, these positive outcomes are best targeted by active managers – hence this is only available in an active investment style.
on to the topic of social change. The pandemic shone a huge spotlight on how companies were treating their staff, whether they were implementing appropriate health and safety, furlough, etc.
Are different aspects of ESG gaining greater focus?
Moreover, ESG funds can often be similarly labelled but do something completely different. For this reason, we have focused on developing a very clear definition of what responsible and sustainable are, and what they’re not.
Clark: The Responsible portfolios are designed for investors who simply want to do less harm when investing, especially in areas such as climate change. These portfolios aim to have reduced carbon emissions (relative to a benchmark) and have at least 50% of investments in funds that pursue explicit environmental or social targets. They are available as active, passive or blended investment styles.
Clark: Due to the interconnected nature of ESG, investors should not focus on one letter over another. Failure to address social issues such as inequality and lack of education will exacerbate climate change issues in the long-term. We need to be thinking about both. They’ve got different timeframes, so from an investment point of view they can offer diversification, which is a good outcome for clients.
To accommodate clients that wish to invest across a variety of different sustainable themes, Quilter’s WealthSelect Sustainable portfolios aim to target a broad range of sustainable outcomes, across environmental and social themes.
We have focused on developing a very clear definition of what responsible and sustainable are
Portfolio managers Stuart Clark and Bethan Dixon explore the growing complexity in ESG investing and how Quilter is expanding its capabilities to meet evolving demand
Why did you decide to launch both Responsible and Sustainable portfolios?
Dixon: One of the challenges to presenting a variety of sustainability options is being clear on the definition. ESG can mean different things to different people and is an emotive topic. Some people may have ethical views, which will mean that they don’t want exposure to alcohol; other people are more focused on environmental issues so don’t want any exposure to fossil fuels, for example.
Does the range of choice in the market present any challenges?
What is your methodology?
Dixon: The first step is we identify funds to fit the investment criteria. This is achieved through a screening process that seeks to narrow the universe of funds that potentially meet the investment criteria. We apply a range of filters including a proprietary set of ESG filters that are aligned to either our Responsible or Sustainable definitions. The next step, and most important, is fund due diligence, where the manager’s approach to ESG integration and sustainable investing is reviewed.
Lastly, the WealthSelect Sustainable portfolios question the intentionality of funds. A fund’s investment universe and process should be based on providing high-purity exposure to the sustainable outcomes it is looking to achieve. For example, within clean energy, investments should be focused on solutions to increase the provision of clean energy, and that should be demonstrated through the holdings and the sustainability characteristics of the fund. We use sustainability outcomes, which are based on the United Nations Sustainable Development Goals, as a framework.
Clark: In addition to the regular commentary on the portfolios, we produce a quarterly responsible investment report that measures the success of the portfolios against their objectives. For the Responsible and Sustainable portfolios, we aim to have a lower carbon footprint than the MSCI All Country World Index and target a broad range of sustainable outcomes (Sustainable only). We will report on these metrics alongside providing additional commentary documenting our responsible investing activity on each portfolio in the quarter.
How do you report on ESG performance to clients?
Failure to address social issues such as inequality and lack of education will exacerbate climate change issues
Dixon: In recent years a lot of attention has been paid to the “E” in ESG, focusing on the environmental issues surrounding climate change. The conversation is now also moving
