Turning darker?
Market report
Fears surrounding the impact of the Delta variant appeared to weigh on risk appetite this week. Risky assets like stocks and certain parts of credit underperformed some of the perceived safe havens, particularly government debt. The Federal Reserve continued to prepare the ground for very slowly pulling back on some of its crisis support.
CIO view
Challenging times ahead…
The short-term outlook for investors is a challenging one. Incoming survey and other data continue to describe a peak in the rate of growth in much of the developed world. Decent growth appears to lie on the other side, but still. Meanwhile, the bulk of the incredible array of policy support is now in our rear-view mirror. There is more to come, and the scale and scope of this could deviate from expectations. However, for now, investors seem to be well on top of what is likely coming and when. The rapid spread of the Delta strain around the world provides the extra complication if it was needed.
The allure of a diversified portfolio in amongst all this may be dimmer to some. Maybe a punt on some wine, art or a little Dogecoin gleams a little brighter by contrast. However, it is still a mixed basket of capital markets assets that offers you the greatest chances of hitting your medium-term investment goals. Whether you are simply looking to offset the corrosive effects of inflation on your savings, or perhaps aiming higher – a deposit for a house, snazzy wheels or a university fund – well diversified exposure to the world’s companies, governments, and wider resources remains the most powerful, and reliable, weapon in your savings arsenal. The sooner you invest, the more hours, days and months you give this exposure to work its compounding magic.
An expanding toolkit for responsible investors
We are also at a time of accelerated change in the industry. The ability to achieve strong returns, proportional to the risk you take, whilst also targeting certain societal, environmental or other considerations, is growing rapidly. As the industry develops, so will we. Through this evolution, we will at all times maintain the standards of broad and detailed due diligence that you should expect of us.
At the most activist end, our impact fund will continue to demonstrate what it is possible to achieve as an investor with the latest tools in the impact investing arena. However, for the rest of the proposition, we express a finer balance. It could simply be that the growing popularity of ESG investing explains all of the outperformance of ESG-related assets over the last decade. If so, then there are inherent limits to how we should think about the relative performance of ESG in the future.[i] However, the most we can say with confidence at the moment is that the evidence on performance is both mixed and too young for strong inference.
In any case, even if there were to be lower returns from ESG investing versus a broader interpretation, that should not, on its own dim, our enthusiasm for investing responsibly. In a space where jargon, and all the accompanying misunderstanding, is proliferating at the same pace as interest, we need to be clear what we mean by responsible and what we are trying to achieve by being so.
If, for example, you wanted to target certain climate-related objectives, would you make the most difference by withholding your pound from various emitters (however indirect or distinct from the core activity of those businesses)? Or, do you achieve more by carefully rewarding those emitters moving in the right direction. In truth, both are valid strategies. In the case of the latter, it is important to augment this painstaking selection by following on with an active engagement strategy, ensuring that the companies we own on your behalf are always clear on the standards and progress we all expect.
The social responsibility of a business is to make profits?
Even here though, we must remember how complicated it is to both locate and drive for a consensus in a time of strong polarised views on literally everything. This very problem was at the centre of Milton Friedman’s (in)famous tract, “The social responsibility of business is to increase its profits”.[ii] Friedman’s doctrine chastises the publicly owned company pursuing what might be its own charitable (and other) objectives with other people’s money. “Taxation without representation” is the accusation. The answer given by Friedman is to apparently narrow a company’s focus to working purely for the shareholder’s financial interests.
Friedman does also make the vital distinction that the focus should be on sustainable profits. If one takes this to its logical extreme, one can argue that this framework should provide impetus for equal opportunity hiring, responsible environmental and wider societal behaviour and so on – if one is to succeed selling to a global market place over the long term, it makes sense to have a work force that proportionally reflects the variety therein. Sustainable behaviour results in longer duration future cash flows etc.
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However, it is not just the responsible investment toolkit that is expanding and changing. Customer/shareholder preferences are changing with it. ‘Purpose’ is a word that is now discussed with much more substance than for many years. We have seen several fascinating tussles between shareholders and some goliaths of the corporate world in the year so far.[iii]
One of the (many) quietly jaw dropping events of the last 18 months involved the exercise of shareholder power. In March 2020, a consortium of some of the world’s largest asset managers asked the pharmaceutical names they collectively owned (on behalf of their many clients) to collaborate on a vaccine, not compete. Was this, as some have argued, the next evolution of capitalism?[iv] One where the financial sector’s masters of the universe channel global shareholders’ myriad perspectives into concentrated power on important issues? The idea of getting big pharma to collaborate on a vaccine was uncontroversial. However, where should a line be drawn? After all, the management committees of these large, successful asset managers are not elected by the people. How can we be sure that our interests are aligned?
On the visible horizon lie multiple existential threats where action today is the only hope for the world. The fact that the prevailing state apparatus in many countries struggled to mobilise in the face of the immediate threat of Covid is rightly a source for concern amongst activists.
Unfortunately, it is not the purpose of this essay to propose answers, just questions. Investing responsibly sounds simple. The point of the above is to convey some of the complexity. The predictably self-serving point that we come back to is that the scale, due diligence capacity, and range of specialisms that we can bring to bear in all of this have a valuable role to play. Both in helping to locate and drive towards those common objectives and, importantly, maximising our many clients’ future financial well-being. The times are changing and you can have confidence that we will continue to carefully deliberately evolve our investment offering with them.
[ii] https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
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*This article is for information purposes only. It is not intended as a product offer or investment advice