Portfolio managers Stuart Clark and Bethan Dixon on staying ahead of volatile markets while harnessing ESG demand
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers, and providers from across the market
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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.
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Against this backdrop, TwentyFour Asset Management has launched the TwentyFour Sustainable Multi Sector Credit Fund – aiming to deliver higher yields by targeting less-liquid credit opportunities and taking a high conviction approach to asset selection.
In this guide, we explore the fund’s strategy in detail and analyse how it seeks to tackle the uncertainty of today’s market while also matching investors’ sustainability expectations.
The global pandemic has left capital markets facing radical uncertainty.
The pursuit of yield in sustainable credit
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
In this guide, we explore the growing importance of sustainability in pensions investment management and explore how the industry and fund managers are working together to address insufficient ESG data and drive change through active engagement.
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.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall. platform.quilter.com Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years. The WealthSelect Managed Portfolio Service is provided by Quilter Investment Platform Limited and Quilter Life & Pensions Limited. “Quilter” is the trading name of Quilter Investment Platform Limited (which also provides an Individual Savings Account (ISA), Junior ISA (JISA) and Collective Investment Account (CIA)) and Quilter Life & Pensions Limited (which also provides a Collective Retirement Account (CRA) and Collective Investment Bonds (CIB)). Quilter Investment Platform Limited and Quilter Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered office at Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter Investment Platform Limited is authorised and regulated by the Financial Conduct Authority. Quilter Life & Pensions Limited is authorised by the Prudential. Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59. Quilter uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall. platform.quilter.com Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years. The WealthSelect Managed Portfolio Service is provided by Quilter Investment Platform Limited and Quilter Life & Pensions Limited. “Quilter” is the trading name of Quilter Investment Platform Limited (which also provides an Individual Savings Account (ISA), Junior ISA (JISA) and Collective Investment Account (CIA)) and Quilter Life & Pensions Limited (which also provides a Collective Retirement Account (CRA) and Collective Investment Bonds (CIB)). Quilter Investment Platform Limited and Quilter Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered office at Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter Investment Platform Limited is authorised and regulated by the Financial Conduct Authority. Quilter Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59. Quilter uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation.
THE INTERVIEW
Name xxxxxx xxxx xxxxx xxxxxxx
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?
Working together
“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.
The process to true ESG integration can be long, complex and difficult for pension schemes - which is why TwentyFour Asset Management has re-aligned its investment thinking to help schemes on their sustainable journey goals
has helped drive risk asset valuations ever higher despite the damage wrought by COVID-19, compressing yields and making portfolio income distribution objectives harder to achieve in both equities and fixed income.
I
Finding stability
Gary Kirk, co-manager, TwentyFour Sustainable Multi Sector Credit Fund
MENU
CLOSE
Charlene Malik, portfolio manager
INTEGRATING ESG
TwentyFour Sustainable Multi Sector Credit Fund
SUSTAINABILITY, VOLATILITY, AND THE PURSUIT OF RISK-ADJUSTED RETURNS
Alistair Wilson, partner
TRANSPARENCY VERSUS RELEVANCY
HOME
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
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. Depending on your conclusion, it can drastically alter your approach to managing investments in the short and long-term.
“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 from 2021 has allowed them to de-risk the portfolios and comfortably evaluate opportunities now they are on the right side of the market.
It's very much about where we think the world is heading and researching into where there is an attractive opportunity set for the long term.
In many respects, UK pension funds and fund managers face the same level of challenges when it comes to ESG integration. One of the biggest is availability of data, which can be particularly problematic in the fixed income space.
“Gathering this data is probably the single biggest issue that is facing any manager or trustee,” says Wilson. Collecting data that can help pension funds compare fund metrics in an easy-to-understand way is therefore one of TwentyFour AM’s objectives, with particular emphasis on quantifying the carbon intensity of funds versus the benchmark.
ESG integration challenges
A key part of identifying opportunities for future returns will be determining which companies are likely to rebound. Clark explains that there might be some companies that are still operating perfectly adequately and hitting their earnings, not seeing cuts, and have strong order books, yet the stock can be down 20% or 30%.
To meet the growing demands of sustainable investing Quilter has looked to target thematic opportunities across its new Sustainable multi-asset portfolios. Bethan Dixon explains that the overall risk of the Sustainable portfolios is balanced between cash, bonds and equity, and then its sustainability focus is implemented through a combination of global multi-thematic and single-focused thematic funds.
As well as presenting long-term opportunities, investing thematically can provide diversifying benefits. Dixon highlights an example of this with a healthcare fund Quilter are investing in, whose performance is less correlated with traditional asset classes.
“Cancer is one of the leading causes of death, so the fund is supporting research and development within the cancer space to help promote good health, wellbeing, and quality of life.
“That fund also provides one of the lowest correlations to global equities, so provides a diversifying return stream in the Sustainable portfolios. In addition to the sustainability and diversification characteristics, we also believe the fund provides a great investment opportunity and so have also taken the opportunity to allocate to the fund in our new Responsible portfolios.” she says.
Crucially, while many investors might view sustainable investing as a separate strategy from a traditional approach, this distinction is only going to become blurred as returns improve. Clark emphasises that if the team identify interesting sustainable investment opportunities, nothing stops them from including those in their Managed portfolios as well.
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.”
“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.
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.
“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.
That (cancer) fund also provides one of the lowest correlations to global equities, so provides a diversifying return stream in the Sustainable portfolios
Q&A
SNAPSHOT
Quilter WealthSelect
2: ‘ESG: What makes 34…our chosen score?’, blog post, 20 May 2021.
Market cycles | Fund performance | Asset selection Portfolio construction | Measuring sustainability
FUND SNAPSHOT
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.
Select a circle to view that portfolios attributes
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).
3
$3.1trn
of global greenhouse gas emissions emanate from the energy sector, including energy used in industry (24%), transport (16%) and buildings (17%).
1
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.
1: 2: 3: 4: 5: 6: 7:
*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
1/5
2/5
3/5
4/5
5/5
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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2/2
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
1: 2: 3: 4:
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*
1:
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
Seeking to capture long-term opportunities with a truly diverse approach
A flexible strategy that is able to reorientate over the long term to help capture different opportunities
Source: Quilter Investors as at 31 October 2022. *Return is the total return, percentage growth, net of fees based on £100,000 initial investment of the Active Managed Portfolio 5 vs the IA Mixed 20-60% Shares sector average over period 24 February 2014 to 31 October 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..
Discrete calandar year performance
-8.2 -6.9 6.9 13.6
49.3
29.5
-11.8 -10.7 -0.6 4.1
*as at November 2022
Proven performance over the last eight years
The WealthSelect Managed Active 5 portfolio has returned £19,000 more than its IA sector performance comparator
WealthSelect is a Defaqto 5 Diamond-rated managed portfolio service with a strong performance track record and £10bn of assets under management proudly supporting more than 1,900 financial adviser firms and 73,000 investors.*
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
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*
Follow the Quilter investors responsible investment principles
Quilter WealthSelect Managed Portfolio Service
Stuart Clark and Bethan Dixon
The interview
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.
With the EU looking to cut carbon emissions and the US having re-joined the Paris Agreement as well as widespread grassroots impetus to fight climate change, we've seen huge demand to invest. Thematic products allow investors to invest in that structural change over the next decades.
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.
We are high conviction managers, which means we don’t tend to hold tiny amounts in thousands of different positions
There needs to be overarching regulation that covers everybody, giving bond investors and issuer alike effective guidance
Charlene Malik, portfolio manager, TwentyFour Sustainable Multi Sector Credit Fund
This is on everyone’s mind. I think we all want to gift a healthy planet to our children, so we want to make sure we are helping drive positive change and encouraging behaviours that help meet that aim. We face this consideration as asset managers, the institutions we serve face it from clients, and its urgency is becoming more evident through the whole chain.
What is creating the demand from institutional investors for a sustainable approach?
Market outlook
Integrating ESG:
Investors face a mountain of regulation and a torrent of data and metrics relating to ESG factors. Charlene Malik, portfolio manager on TwentyFour’s newly launched Sustainable Multi Sector Credit Fund, explains the firm’s approach to these challenges.
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
Obviously, as bondholders, we don’t have voting rights to express our views on a company’s business practices, as shareholders do. But every portfolio manager has a relationship with these companies. If we want to express our dissatisfaction with an issuer on something or want to influence them to act in a certain manner, we have that direct route to the company’s decision makers.
We are high conviction managers, which means we don’t tend to hold tiny amounts in thousands of different positions; when we invest we do so meaningfully. We can decide to exit a bond if we are not happy, or we can refuse to participate in any refinancing if we have ESG concerns, and we have done so previously.
Can fixed income funds have real influence on ESG issues at companies?
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 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.
