Wealth managers' ESG offerings extend lead over rivals; The return of rising bond yields

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Last year was a record-breaking one for ESG fund flows – and those who bought in to DFMs’ own sustainable portfolios were handsomely rewarded.

When we last checked in on wealth managers’ ESG returns, at the end of Q3 last year, things were looking pretty healthy. But another theme was soon to make its way to the forefront of investors’ minds: the reopening trade seen in the final two months of 2020.

Ultimately, however, that did little to stymie ESG funds’ status as the top dogs of the investment world – and it didn’t lead to a drop off in relative performance, either.

Our analysis shows the average sustainable balanced wealth portfolio returned 7.3 per cent in the final quarter of 2020, compared with 6.6 per cent for the conventional equivalent. Nor did all of these gains take place in October: ESG performance remained in the ascendancy in the weeks following vaccine trial data.

Add that to the outperformance seen in previous quarters, and the difference is particularly stark. For 2020 as a whole, the typical sustainable moderate portfolio returned 10.5 per cent. That dropped to 6.5 per cent for regular balanced portfolios.

The gap between ESG and the rest did narrow in the fourth quarter – and returns in the early weeks of 2021 are much of a muchness, too. One reason is that DFMs are increasingly adding their ESG favourites to their regular portfolios – underlying positions no longer look as different as they once did.

But regardless of whether performance is partly a case of the tail wagging the dog – as mass inflows push up the prices of ESG stocks – it would take a brave wealth manager to predict that these dynamics are likely to change any time soon.

One dynamic that has shifted (again) in recent weeks has to do with both the US dollar and Treasuries. Not for the first time, the greenback has been confounding consensus expectations at the start of a calendar year.

Those who thought its strength would be erased as investors bet on economic recovery and move away from safe havens have been caught out – because some now see the dollar as a risk-on play. Anticipation of more stimulus spending in the US have given the currency a fresh leg up. Just as notably, its inverse correlation with global equities has started to weaken.

Another factor in recent dollar strength is an uptick in US Treasury yields. Thirty-year US Treasury yields hit their highest levels in 12 months overnight, while the yield curve is at its steepest level in more than five years.

These are small moves in the grand scheme of things, but as allocators have been warning, it doesn’t take much of a shift nowadays to hurt existing holders. Such is the nature of ultra-low starting yields. So while most investors are still relatively sanguine over the prospect of an inflationary surge later this year, particularly while the Federal Reserve is happy to sit on its hands, a lot could happen to prices in the meantime.

There are also more implications for corporate debt than there once were: the FT reports today that the average duration of US corporate bonds now stands at 8.3 years, up from 6.5 years a decade ago and 7.7 years just 12 months ago.

For now, these are very much short-term trends. But investors have had to train themselves not to worry too much about inflation over the past decade. It may not take much for those worries to reignite, however unlikely the prospect of an actual inflationary shock may be.

For obvious reasons, Neil Woodford has more or less stayed out of the headlines in recent months. The tangible legacy of his ill-fated fund house has been reduced to sporadic updates over how much money investors will ultimately recoup.

But that process has risen higher up the agenda this morning with the news that law firm Leigh Day now says it is “in a position to formally launch” its claim against Link Fund Solutions, having secured appropriate funding. ShareSoc, meanwhile, has given its backing to that claim – the first time in its history that the consumer body has done such a thing.

The proof tends to be in the pudding on such issues: it wasn’t so long ago that Leigh Day was focused on Hargreaves Lansdown, rather than Link, and there’s still no guarantee the case will advance to court. But further steps down this road will ensure the saga remains in the headlines, and will do little good for the fund industry’s reputation in the eyes of consumers.

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