FT Adviser Podcast - Why Responsible Investment funds have outperformed since the pandemic began

31 July 2020
Listen to our latest collaborative podcast with FT Adviser.

Lorna Blyth, Head of Investment Solutions joins David Thorpe, Special Project Editor at FT Adviser and Adrian Lowcock, Head of Personal Investing at Willis Owen to discuss why Responsible Investment funds outperformed in the three months since the COVID-19 pandemic began. 

David Thorpe:         

Hello and welcome to the FTAdviser four-part podcast series on ESG Investing brought to you by Royal London.

This episode of the podcast looks at the outlook for responsible investing in the world after the pandemic.  I’m David Thorpe, Special Projects Editor at FTAdviser.  I’m joined to discuss this topic by Lorna Blyth, Head of Investment Solutions at Royal London, and by Adrian Lowcock, Head of Personal Investing at Willis Owen.  Thank you both for joining us today.

Adrian Lowcock:     

Thank you, hello.

Lorna Blyth:             


David Thorpe:         

A feature of the severe market sell-off that investors witnessed in March was that responsible investing funds generally performed better than those more traditional fund products.  Lorna, why do you think this was?

Lorna Blyth:             

Yes, so we did see that and actually Morningstar has got some good data to show that in March 62% of ESG focused large cap equity funds outperformed global passives.  To look at our fund range we have a set of sustainable funds which focus on companies that have a positive net benefit to society and they have generally outperformed our broader multi-asset range year to date.

So I think there are a few reasons for this.  The first is that most ESG focused funds are typically a bit more concentrated, exposure to a narrower range of sectors than more traditional funds.  So, for example, they’re likely to have less exposure, if any, to things like fossil fuels, airlines, both sectors which were hit quite hard due to obviously lower demand for travel and energy.  In contrast, typically these funds have had higher exposure to the growth sectors such as tech, pharma, again both sectors which did relatively well during the sell-off.

So I think these funds have been positioned well, either as a result of some of their criteria whereas - the exclusion criteria or sometimes their positive inclusion criteria, which meant that generally they were less exposed to areas of the market which were hit hardest through the sell-off.  I think there’s another reason for that as well and that is these funds with a strong ESG focus will typically invest in companies which have strong environmental, social strategies in place, and are typically well governed.

There’s lots of evidence that companies that have that in place are managed more efficiently and can respond better to good and bad times.  So I think broadly that’s also helped to support performance of these funds through this crisis.

David Thorpe:         

Thank you. Adrian what are your thoughts on that, was it as simple as the oil price fell off a cliff and airlines basically didn’t have the business or are there more reasons than that?

Adrian Lowcock:     

Yes, and I think we’ve got to start with the oil price, it collapsed.  If you don’t hold the oil sector and with that some of the more wider mining stuff as well then you will have benefited, and likewise particularly things like airlines.  But I do think there’s a bit more to it than that.  This was a particularly humanitarian crisis whereas other recessions or events that hit markets don’t necessarily have this humanitarian angle.  That has led to a behavioural shift and we saw it. 

You know companies that were testing the boundaries of quarantine and the rules that were being put in place weren’t particularly well regarded in the market place.  One example was initially Sports Direct tried to look for loopholes in the rules and the share price got hit for that. 

So the market did respond to that humanitarian thing and I think speaking to the E in the ESG - sorry the G in the ESG element, good governance and strong management was reflected in how they responded to the crisis, and where companies perhaps helped and stepped forward to help they were rewarded for it and recognised for that in the market place.  So I think that humanitarian element also came into play in the markets as well.

David Thorpe:         

Thank you and Adrian to take that theme on a little bit further there’s much talk and speculation and conjecture about how society will look very different after the pandemic.  Do you feel that responsible investment funds are an interesting way to profit from those potential changes?

Adrian Lowcock:     

Yes, absolutely, I mean as Lorna said the focus has been very much on the technology and there will be change in the workplace, there will be change in consumer behaviours after this crisis.  We’re still – we’re already seeing some of those changes.  Technology is going to be a big factor in that.  But I think also there’ll be a lot of reflection on how we consume goods and do we need to buy fast moving and short term fashion trends? 

I think one of the big fashion houses has already announced they’re shifting away from seasonal clothing ranges and looking at perhaps twice a year or something as opposed to being seasonal.  That’s a big shift in the fashion industry which has always been about short term - a rotation of trends and fashions.  I think there’ll be other areas that are a bit more nuanced I think the travel industry, for example, airlines. 

People are saying they may not fly as much but I think that demand will come back because people like their holidays, it’s a reward for the hard work they do all year round but they may holiday at home a little bit more initially.  But you can’t access everything in the world in the UK so I think the travel industry will bounce back but it might take a few years to do so whilst they adapt to the new way of things.

David Thorpe:         

Thank you.  Lorna, Adrian touched on the point there about technology as being potentially central to these changes.  Is that something that you feel responsible investment funds can access, the great potential for technology to change how we live and maybe the pandemic has sped up the move and the development of those technologies?

Lorna Blyth:             

Yes, definitely and we were seeing that pre-Covid anyway where a lot of the growth sectors have typically outperformed value sectors over the last few years.  So I think that the Covid just really accelerates some of that.  If you look at even healthcare and companies such as GlaxoSmithKline that develop vaccines and you can see that going forward that they’re going to play a much stronger role in society than they have in the past.

But I think really the two key things to consider is how do these changes translate into investment decisions that the fund managers are making?  How are they looking at environmental, social, governance factors, and incorporating that into their decision making process, and that requires due diligence really to understand that.  There’s a lot of funds available in this space so I think it’s still really important that people do their due diligence, understand the objectives of the funds, the processes followed by the fund manager, what exclusions there are if any, what themes are getting reflected in the holdings?

I think the other part probably is how does the experience that we’ve all been through impact the investment decisions that are getting made by clients and this is maybe a good opportunity, a catalyst, where advisors can start to ask about client preferences in this space.  Obviously from summer next year regulation is coming into methods to require advisors to start to do that.  But it does feel like this is a bit of a catalyst to start to have those conversations if they’re not happening already.

David Thorpe:         

Thank you Lorna, and do you feel that just as company managements are becoming more aware of the changing world that this is going to percolate down to the end client and that we will actually see from end clients a greater demand for responsible investing funds?

Lorna Blyth:             

Yes, so we were seeing demand anyway.  If I reflect on our own experience, in the last year we’ve seen a significant increase in the number of questions we’re getting now on responsible investment or ESG from both customers and from advisors as well as employers so we can understand what options they’ve got for their schemes.  So we were starting to see that demand coming through anyway and again I think Covid starts to just accelerate some of that. 

Some of that is based on a desire to reflect values more.  Some of it is about understanding a company’s purpose. I think probably a lot of people are much more aware that their pensions are an investment because they’ve seen the value of them fall quite significantly in some cases over the last few months.  So that I think people are starting to understand and connect that much more. 

We run a survey every year across our customer base to look at attitudes towards responsible investing and what themes are important to our customers, and generally there’s risk return still comes out as number one in terms of what’s important to them.  We’re about to re-run that actually to see if any of those attitudes have changed as a result of Covid so watch this space.  But I do think that we’ll definitely see that that’s accelerated that demand and that trend.

David Thorpe:         

Thank you.  Adrian you’re at Willis Owen, you’re right down there at the coal face with the private investor.  Is this something that from your point of view and the point of view of Willis Owen is this something you’re starting to see on the platform?

Adrian Lowcock:     

It’s been a small change initially and I think that’s because we started from a very low base if you look at the IA statistics over the years.  It’s always been around 1.2% that they cover the ethical investing.  I think what we are seeing is a change and it’s not just the younger people actually that’s the interesting thing.  You would assume it was the new generation coming in to invest.  But it’s actually a little bit signs of older people investing on behalf of their children or grandchildren so making that conscious decision.

I think a lot of this has been driven by that governance element because I think if you’re an older investor you can understand that concept easily, and then it helps introduce the social and environmental and ecological – ethical factors that might come in.  Then you’ve got – these investors have seen events like – I’m trying to think of one – so like Enron perhaps years ago and the VW Dieselgate, what bad governance does and actually the impact of being socially questionable can have on a business.  So, yes, we are seeing some change.  I think it’s still early days but I do expect that momentum to build.

David Thorpe:         

Thank you and Adrian just to take that theme on one step further.  One post-pandemic change that we could see is a sharp reduction in the use of carbon, whether that’s from short haul flights or more people indeed working from home.  Is that maybe the theme that investors that you talk to are most conscious of or most anxious to gain exposure to?

Adrian Lowcock:     

I think the effect of us all staying at home has been quite profound on the weather.  We’ve noticed much bluer skies since we’ve been there.  So I think that will be interesting to see.  The question perhaps have we reached peak oil and it’s not just from an investor perspective or a consumption personal level, it’s also from a deglobalisation potential.  Because obviously there was a lot of potential disruption to trade in the early days of this crisis.  I think investors will look at that carbon aspect.  I think they’ll look at it as part of other wider issues. 

I think they’ll look at healthcare as a big issue.  I think that’s going to be a big, big factor actually of this crisis because if you look at how people have responded to the NHS and look at how the government have spoken about it.  There’s always the underlying thing is your health is more important.  Money can buy you many things but health is something absolutely critical and I think that will become – that’s where things – well people will value a bit more their own health and welfare.  So I think that’s going to be a big, big factor. 

Technology I think has already been a big factor in this.  For anyone who has worked at home it’s been absolutely essential and I think things like decarbonisation I think as an investment theme it will work. What I’m questioning is perhaps the behavioural change that might come later.

David Thorpe:         

Thank you and as anyone who has to work with me know is my inability with tech is legendary but even I’ve managed to muddle through working at home so it can’t be too bad.  Lorna, is the theme of decarbonisation and lower use of carbon is that something that is central to many of the products that Royal London have in this market?

Adrian Lowcock:     

So, I think there is a piece in terms of short term positioning.  We know the airlines have been badly hit and how companies are responding to these short term changes will be critical, and that will be reflected in investment analysis that’s done as part of your active investment decision making.  In terms of tactical positioning, we’ve been underweight in airlines across our multi-asset portfolios going into it for various reasons.  Again Covid is something that’s just accelerating that.

But I think more generally it will be the longer term we will see reductions in carbon.  The UK is committed to meet net zero carbon by 2050 and portfolios over time will need to reflect that and put in place milestones for how they’re going to get there.  That’s certainly something we’re looking at in terms of how do we implement a reduction in carbon and what does that look like, how does that step change happen over time?  It’s unlikely to be a gradual nice smooth reduction.  

You’re probably starting to – we will see some kind of step changes so it’s just about how you manage that and are preparing for that over the longer term.  But it will probably be – I think it’s also important to remember it’s not just about the stocks that you’re holding but also about how you’re engaged, your asset managers engaging with the companies that they’re holding.  Most of us are investing for a long time period and economies are made up of more than just tech, healthcare, millions of people are employed in the travel, aviation, and energy sectors.

So this risk of stranded assets and failing sectors will have significant impact right across the globe.  I think it’s important that you understand how your asset managers are working with these companies and sectors, where possible, to help them to progress and adapt to that changing landscape.  So there’s a short term piece here but there’s a general longer-term trend that is going to be kicking in and how your investments are positioned for that, and asking those questions of your asset managers I think will be important.

David Thorpe:         

Thank you.  Lorna, a feature of recent years has been certain fund houses I suppose and many, many companies trying to talk up their green credentials if you like, their commitment to ESG.  Do you think that the pandemic has made companies more aware of their responsibilities rather than just the rhetoric around this, and more focus from investors on those businesses that really are doing this properly rather than just putting out press releases mentioning it?

Lorna Blyth:             

Yes, so there’s two parts to that, the companies that you’re investing in and then what your asset manager is saying and doing and does what - their actions reflect the rhetoric I guess?  As Adrian said, this has been a humanitarian crisis and how companies have responded to it can almost be viewed as a proxy for how they treat their customers and employees.  So it will be interesting to see how much of that feeds through into where people choose to spend their money and how they choose to spend their money going forward. 

Social media has played a huge part in shining a light on some of that company behaviour and calling out areas of bad practice.  We all hear about these companies now so I think the companies themselves need to be more aware of that.  I think they are going to be more aware of that going forward and that is about how well they’re governed and how they can adapt and prepare for some of these changes going forward. 

On the other side I think you’ve got the asset managers and what they’re saying that they’re committed to and how they look at ESG and incorporate that.  Do they effectively do what they say on the tin?  Some of that is asking questions, it is about specific stocks, for example, how they’ve voted, how they’ve been engaging with the various companies.  So I think it’s important that investors who feel strongly about this are able to ask those questions of their asset managers and get the answers that they’re looking for.

David Thorpe:         

Thank you.  Adrian, from your point of view, I mean Willis Owen must get contacted very frequently by fund houses talking up, highlighting, promoting their products in this space.  I mean do you notice is there a way that a private investor can look at this and see which ones really are doing what they say on the tin?  Is that something that investors are going to become increasingly aware of, the difference between those fund products which just stick the word sustainable in the fund name to get flows, and those who really do try to invest in that way?

Adrian Lowcock:     

Yes, I think it’s been an interesting crisis from our perspective.  Because I think what will actually happen is a big aspect of it, I think fund management groups will realise that they can’t just stick a label on it anymore, because the consequences of doing so are actually reputationally quite damaging to the business if you’re not living and breathing and stuff.  From our perspective when we’re mentioning funds to clients and tipping our fund ideas, the ESG factor is a fundamental part of the overall assessment of that fund.

So for us the green washing has been an issue and I think it’s being addressed by analysts in the industry.  Because what they’re doing is integrating this into their research process so it becomes harder for fund groups and fund managers to actually pay lip service to it.  There’s still a lot of work to go and still a lot of learning, how far you go down the road and how much analysis is done of a company?  In manufacturing there’s a term called cradle to gate and cradle to cradle. 

Cradle to gate is the manufacturing gate and then cradle to cradle is the life – the whole life of the product from manufacturing to being on the skip.  It’s just how much you actually analyse that, what are you actually analysing that analysts look at when they’re speaking to the fund managers, how much detail you go to?  Now either is perfectly respectable and fine as long as you’re clear and candid about it.

From an investor perspective I still think there’s a lot of confusion in the terminology.  You‘ve got responsible, sustainable, ethical, environmental, and all of that stuff.  I think the terminology can be a bit confusing and I think that’s where we need to come in, and we are coming in and stepping in and helping as an industry to make that clearer, to help them understand what’s available and help them find what they’re looking for as well.  Because some people want very ethical stuff, some people want a more responsible socially conscious type approach. 

David Thorpe:         

Thank you Adrian, and Lorna and Adrian thank you both for joining us today.  Tune in next time for the next in our special series of podcasts on responsible investing. Thank you.

About the author

Lorna Blyth

Head of Investment Solutions

Lorna is Head of the Investment Solutions team at RLI and has responsibility for the development and promotion of Royal London's investment proposition including the award winning Governed Range. She has worked in pensions and investment since 1990 and holds the IMC qualification and a Masters in Investment Science.

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