Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Impact fund rebalances as market wobbles
On a whistle-stop tour of Australasia last week, MacLean said the WHEB fund saw a higher level of buys and sells than normal as the manager repositioned the strategy during the first quarter turbulence on global stock markets.
WHEB, which offers an Australian unit trust version of its core strategy under the Pengana flag, targets a concentrated portfolio of listed companies making a positive contribution to solving global issues such as climate change.
While the manager typically holds stocks for a long period, the March quarter sell-off saw WHEB take on eight new holdings over the period and discard a similar number – equating to almost 20 per cent of its 46-stock portfolio.
According to the WHEB investment committee March meeting minutes, the number of new “purchases has been significantly higher in the recent period due to the team taking advantage of volatility in the market to buy into high quality companies at attractive valuations”.
NZ favourite Fisher & Paykel Healthcare was among the recent portfolio arrivals along with UK energy efficiency firm, Spirax-Sarco, and green energy provider, Solar Edge.
“Members agreed that all the additions were consistent with the philosophy and policies of the strategy,” the WHEB investment committee report says.
Unlike most impact investment funds, WHEB pursues the approach via listed markets rather than through private assets. The manager has grown to about £1.4 billion under management including A$300 million sourced from the Pengana-fronted product.
MacLean said there was growing interest in both Australia and NZ among financial advisers in the impact investment style – although the distinction between it and more general environmental, social and governance (ESG) strategies remains an issue.
“There does need to be more education on the differences of impact investing versus ESG,” she said.
But her down-under visit coincided with a run of poor relative performance for ESG strategies that also played out for the growth-oriented bent of the WHEB portfolio.
“Overall, the strategy has struggled in current markets. The key causes of this have been concerns about inflation which has resulted in strong performance from oil and gas companies and from financial sectors. These are two parts of the market where the WHEB strategy has no exposure,” the investment committee noted in March.
“In addition, there has been a strong rotation in the market away from ‘growth’ oriented companies and towards ‘value’. The WHEB strategy is focused primarily on growth – companies that provide solutions to sustainability challenges that are characterised by strong growth.”
Nonetheless, the manager continued to see net inflows during the quarter while upgrading the fund capacity limits to £8 billion.
MacLean said investors in the fund were looking through current performance weakness to focus on the long-term financial and impact targets. However, she said managers had to work harder to demonstrate the real-world impact of investment strategies labeled as such.
WHEB has developed a number of bespoke measures including a calculator and a map showing how its investments have achieved impact goals. But lagging performance and a growing backlash against ‘greenwashing’ – a trend that claimed the scalp of Deutsche Bank asset management chief, Asoka Woehrmann, early in June – has put a dampener on the seemingly unstoppable ESG movement this year.
“There’s a risk that some investors will lose trust in ESG,” MacLean said.
On the upside, she said the growing scrutiny of ESG claims should help investors better distinguish between managers.
In a recent commentary, WHEB head of research, Seb Beloe, said: “The rapid rise to prominence of the ESG agenda was always going to generate a backlash. There is also still a lot of confusion about what ‘ESG’ is and is not. In this regard, the current criticism offers a useful test which should help validate the approaches that deliver real value to clients and sift out those that do not.”
Following a 10-year stint at Aberdeen Standard Investments, MacLean joined WHEB in July 2021. WHEB took over as manager of the former Hunter Hall Global Deep Green Trust in 2017 after Pengana bought the well-known Australian ethical investment business.
