‘ESG is at the heart of megatrend investing’
Penellists:
- Chanchal Samadder, head of product strategy, Lyxor ETF
- Pierre DeGagné, head of funds selection, DBS Private Bank
- Jacob Doo, chief investment officer, Envysion Wealth Management
- Jean-Maurice Ladure, CFA, executive director and head of equity applied research, EMEA, MSCI
- Lukas Neckermann, managing director, Neckermann Strategic Advisors
- Noli de Pala, chief investment officer, Trilake Partners
- Richard Lander, director, Citywire Engage
Richard Lander: Do you use passive investing in client portfolios?
Jacob Doo: We do for family offices, yes. If you look at relative returns, you see that active managers have not been able to outperform in the past few years. The problem we sometimes find with ETFs though is that they are not a true reflection of the underlying market in some cases. In the fixed income market, for example, the bid/offer spreads of bonds could be so wide in the actual market environment that they didn’t reflect accurately in ETFs. Whenever we see an ETF trading at a high premium, we try to stay away from it.
Noli de Pala: We have a fair bias toward active management and our discretionary portfolios are more focused on hitting quantitative targets rather than market benchmarks. Whether or not we are beating a market benchmark is not a consideration. However, as we have dialled down the beta on our portfolios, we have exited most broad, cap-weighted ETFs. Yet, we are invested in some thematic ETFs that are very small and industry focused.
Pierre DeGagné: We don’t use ETFs that much. For us, they are primarily a means to create benchmarks for our active managers. There are some cases where we might use ETFs, for example to get quick access to a market or a basket of securities that are in line with our CIO’s views. Most of the time though, we focus on identifying funds that can add value over ETFs.
Richard Lander: Chan, what is your view on that?
Chanchal Samaddar: Generally, I think there’s no such thing as a passive allocation. Even if you are buying a traditional, very simple, market-cap weighted ETF, you are making an active decision – you are actively deciding to allocate more to larger companies.
In the case of thematics, the line between active and passive investing is completely blurred. Products are extremely different in how they behave and how they attempt to capture a theme, with actives generally making more concentrated bets and decisions. However, if you look at performance differences within a theme like future mobility, you will see that active and passive funds in the middle of the pack are all performing very closely to each other.
Seven years ago, I think I would have agreed that thematic investing requires an active approach as it is quite forward looking in nature. After all, you are trying to identify future winners and ETFs are built to be consistent. Yet, the performance of different ETFs or passive products that are tracking the same thing varies greatly. Performance differences range from single-digit to hundreds of basis points. That is because each index is taking a different approach to capture a specific theme, which leads to an extremely vast dispersion.
This sets thematic ETFs apart from, say, value ETFs. Even though the performance of value ETFs can also differ by more than a few basis points, depending on their constraints, it is generally quite homogenous.
Richard Lander: What role does ESG play in your thematic ETFs?
Chanchal Samaddar: As an important component of long-term structural trends, ESG is at the heart of megatrend investing. You can’t talk about future mobility and smart cities without considering ESG. It is not just an afterthought but has to be integrated into the investment process from the get-go. ESG is at the core of most of our themes, so the indices we use have to be ESG-compliant.
Jean-Maurice Ladure: The way we position thematic investing at MSCI does not focus on specific sectors and factors. With our indices, we touch on both megatrends and ESG. For example, we do a lot of work on the impact of a low carbon economy transition. That trend is not a fad in my opinion. Our approach enables us to combine all these different aspects on a global level across large-, mid- and small-cap companies. You would certainly find some pure players, potentially the next FAANGs of the world.
Richard Lander: Lukas, based on your experience in consulting companies around the world, do you think the asset management world is lagging behind the broader appetite for ESG factors?
Lukas Neckermann: Pretty big chunks of investment money out there, such as university endowments, are going toward fully decarbonised portfolios, so there must be an interest. On the company side, you see the strive to accelerate the world’s transition to sustainable energy time and time again. Companies that are featured in thematic indices have a mission that is going toward greater sustainability and greater attention to a social good. Call it the ‘triple bottom line’, call it whatever you like – ultimately, it seems to be doing well for investors.
Richard Lander: Let’s get the investors’ point of view. How important is ESG for your clients?
Noli de Pala: We never had a client actively asking us to make their portfolio ESG-friendly. There were a few who have mentioned it, but only after we prompted them – it never happened out of the blue and of their own volition. Yet, we have decided to incorporate ESG into our decision-making process.
Jacob Doo: ESG is an important consideration for us, definitely. In every conversation I had with US and UK fund managers in the last couple of weeks, ESG was one of the main topics. We focus on incorporating ESG themes directly into companies, which is why we have ventured into private equity deals.
Companies have to meet certain benchmarks and responsibilities when we invest in them, so we want to make sure that we have a certain level of control over company processes. For us, it is also important to look beyond publicly available information by having conversations with key employees. This enables us to get more information on a company’s overall philosophy.
Companies have to meet certain benchmarks and responsibilities when we invest in them, so we want to make sure that we have a certain level of control over company processes. For us, it is also important to look beyond publicly available information by having conversations with key employees. This enables us to get more information on a company’s overall philosophy.
Pierre DeGagné: ESG plays an increasingly important role for us. Clients don’t usually bring it up themselves yet, but it is coming more to the fore. Our main criterion when choosing ESG products is that they add value to our clients’ portfolios – I see it as our responsibility to find products that can do both: add value and meet ESG criteria. We also want to empower clients to incorporate ESG into their decision-making process so as to make more informed investment decisions, and have thus integrated MSCI ESG ratings into our wealth product suite earlier this year.
