Midweek Musings – The FCA catches up on ESG classification
Recently…
As reported previously, post Brexit, UK collective fund managers were only able to rely on EU guidance in classifing their funds against investors’ sustainability expectations. The EU’s first effort was known to be a high level starting point with a system that in practice meant funds would either be classified as having serious ESG ambitions and some rules to back that up or on the other had making some vague claims to considering sustainability in their stock selection.
The unavoidable vagueness of these classifications was of course instantly taken advantage of by marketing departments who got out their fat paintbrushes and rollers and started greenwashing as many funds as they could. It has taken national regulators to call out this obvious abuse and fine some extremely large global players some significant sums – a case of making an example, I suspect. A few senior employees have blown their careers on assuming that this whole ESG concept was just some woke fluffiness that was best ignored.
Watching Brief – November 2022
Pottering About
I will progress to my observations on markets and the investment climate shortly but I want to start by introducing a slight change in the content of my monthly posts – a subtle refresh, if you like. The Digging Deeper part of this monthly missive has now covered enough topics to form a small reference book and until I have a list of new topics to cover, I am giving it a rest.
Instead, I will return to an idea that long term readers may vaguely recall. This will be headed ‘Hit or myth’ and will each month put a few supposed ‘ facts’ about the economic, financial and investment climate under my quality control spotlight for testing to destruction.
There are many such ‘givens’ recycled through the mass media every day, often referenced by people who ought to know much better – like politicians and the financial or ‘money’ editors of quite serious publications and broadcasters – but some of these accepted truths are in fact imagined or based on what I think are false premises.
Much of my analysis is on offer because of one of the few advantages of being older now, that is having many decades of working in the financial services sector and just as long reading and viewing extensively to try and understand the human condition. Not Harry may not have the supposed (Biblical) advantage of ‘grey haired wisdom’ but that is only for want of raw material!
You may well disagree with some or even all of what I suggest is the reality, as opposed to the myth. The constraints of a blog post mean that I am not able to write a thesis in support of my opinion and in most situations, it does not really matter what I think. The world will carry on as it wants to, of course.
I am only hoping that I can prompt my readers to take a skeptical view of the ‘accepted wisdom’’ and that this will better inform your asset allocations decisions. At times, what I predict is a nonsense does eventually prove to be exactly that (eg valuations of shares like Nikola, ASOS and THG, or the incredible track record of certain Baillie Gifford funds) and people who shared my skepticism may well have benefited in their pockets!
You could not make it up
This heading of course refers to political events in the UK over the last month. If October 1987 gets remembered for Michael Fish and the hurricane that he so confidently dismissed, October 2022 will forever be associated with the name of Liz Truss.
The (predictable, and in fact actually predicted) consequences of the Kamikwasi not a budget mini-budget are now largely behind us, apart from the damage done to the UK’s reputation internationally and the opening of a rip in the relationship between the Treasury and the Bank of England. Apart from enhancing the case for fixed income assets which I had been exploring anyway, I can’t find anything relevant to say about what is now a dead event and we must now await for the proper, normal(ish) Autumn Statement due in a couple of weeks.
Midweek Musings – Ethical Bond Funds (fixed income primer – final part)
Quite a few of my subscribers are keen on investing in ESG (sustainable) or ethical funds. It is quite easy to find equity funds of that sort and I have written about the hazards of ethical equity fund ESG classification (a hot topic still in the investment industry). There is a ‘How to’ article on investing in line with your conscience in the permanent content of the web site.
But what about the fixed income element of your portfolio, if you now want to add one? If you do, you would be in good company as many professoonal investors have returned to this asset class very recently.
Green Bonds
(as opposed to Green Shield stamps – an aside for readers as old as me!)
Midweek Musings (fixed income investing, part 5)
The remarkable political events of the last few days mean that the yields on UK Government debt (gilts) have been up and down like a fiddler’s elbow and that will have fed turmoil into fixed income markets in general. The iShares Core £ Corporate Bond share (a useful benchmark) is unsurprsingly down a scary amount year to date but has been up and down like a yo-yo since late September.
It remains my opinion that although there will be great opportunities to invest in fixed income assets for those who need something other than equities in their portfolios, and such opportunities have not existed for a long time, it would be a brave invesor who went into the market right at this moment.
Nonetheless, now is an ideal term to brush up our knowledge of the investment options.
I already covered the requirements of an investor wanting a slightly spicier alterenative to cash on deposit and now I want to address the requirements of investors who are looking for an asset class diversifier, or even a tactical play to make a ‘quick buck’.
Narrowing the options
A look at the list of investment sectors or peer groups published by the Investment Association will reveal a bewildering range of fixed income funds from UK Gilts to Global Emerging Market Bond (local currency). Someone with plenty of experience could mix and match funds from various peer groups and put together a package of funds with varying characteristics to diversify risk within the fixed income asset class.
Or you could choose a passive index tracker fund, like the Vanguard Lifestrategy series with a high bond component (which in fact true for most of the options) and you will get a fixed exposure to a variety of fixed income assets. For example the Lifestrategy 40 fund includes, among others, a large holding in global bonds, some UK governmant bonds (gilts) and also UK Index Linked Gilts. The Fixed Income style box from Morningstar records a high sensitivity to interest rate changes and medium credit quality. The fund has lost 15% so far this year (compare with a fund I review later) in Sterling terms, so hardly the lower risk option one might have thought from the traditional viewpoint or even the marketing material.
Picking bond funds for the novice is a nightmare, right? Potentially so, I suggest. But I can help!
Midweek Musings – Bonds Q&A
I am pausing my mini-series of posts on selecting bond funds for specific objectives to write about some high level issues, because what has been happening in the fixed income markets recently has been so remarkable that it is being described as a ‘first’ by specialist managers with over 30 years experience.
I will pose and answer some questions but would welcome others from readers with a view to publishing the answers in another post. Please use the comments option or email me if you prefer.