Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
Osmosis goes for growth down under
International sustainable manager Osmosis is opening up its flagship ex-fossil fuels strategy to Australian wholesale investors, with a founding investment from the University of New South Wales. The local trust will feed into a UCIT Irish Collective Asset-management Vehicle for UK and European investors, which also has founder capital from Oxford University Endowment in the United Kingdom.
“Going ex-fossil fuel makes sense morally,” Osmosis founder Ben Dear tells ISN. “But while you’re targeting a healthier planet, you’re not necessarily going to be delivering a wealthier outcome to your unit holders. Going down that mainstream (exclusionary) approach comes with all kinds of unintended outcomes. If you’re a passive or passive plus style of investor and excluding those high polluting sectors, the risk needs to be re-allocated somewhere.”
Osmosis observed that other managers running exclusionary strategies re-allocated that risk to higher growth sectors like tech, reweighting portfolios away from value/defensive sectors. What markets saw in 2022 was the outcome of that; the Nasdaq collapsed, and oil hit $130 a barrel. Investors didn’t achieve anything in terms of sustainability – Apple, Meta and Alphabet don’t have anything to do with creating a more sustainable world “in any shape or form” – and suffered significant underperformance that will take time to make up.
“In the asset management industry, there was a reaction like ‘Oh my word, we need to reflect and learn from our mistakes’ and from the asset owner side the reaction was ‘Wow – we were sold these as reasonably low tracking error products but now we’re running tracking error of two per cent’,” Dear says. “They were running active portfolios as their beta book.”
Osmosis instead allocates that risk to companies with high resource efficiency scores – which it believes provide uncorrelated alpha – across the rest of the economy: “cutting off the fossil fuel supply” and targeting those companies using less of it to create economic value.
“We think we’ve solved this really challenging issue facing investors that are extremely nervous about the implications to the risk within the portfolio and the return,” Dear says. “If oil hits $150 a barrel, are you going to be consistently underperforming by taking this very principled stance of excluding fossil fuels?”
Osmosis is fairly well established in Australia, managing around A$2.7 billion on behalf of local investors in its existing strategy suite. Its main client down under is Commonwealth Superannuation Corporation (CSC), which it picked up after five years of travelling here when they “couldn’t get the guys around the corner (in London) to speak to (them)”. Its local distribution is currently handled by third-party marketer Clearway Capital and it’s now looking to build out a permanent Australian presence.
“The impetus around our existing strategy suite – although involving a lot of customisation – is really gaining traction, because we’ve proved out this link between reducing environmental footprints and delivering better risk-adjusted returns… The commitment to the region is growing off the back of that – we’re onshore doing this.”
In early 2023 Osmosis was the recipient of a US$4.5 billion mandate from Pensioenfonds PGB for a customised, segregated version of its Resource Efficient Core Equity fund, which is thought to be the largest new ESG equity mandate in history and which doubled Osmosis’ assets to more than US$9 billion.
“It took many years of working in collaboration (with PGB),” Dear told ISN at the time. “They didn’t want to go too quickly because the dynamics of the industry were changing. More data was becoming available, more data vendors were becoming available… They wanted to find a way to make sure that if they were taking a significant step that that risk was going to be rewarded, or at least have the opportunity to be awarded.”
