Q2 – 2021
ESG – ESG TAKES CENTRE STAGE IN UK FUND SELECTION
ESG criteria have a central place in the fund selection process for a growing number of selectors in the UK. Seven in ten London-based fund selectors now have an internal ESG policy, while another 60% deem ESG criteria ‘very important’ when selecting a fund.
At the same time, however, 40% of fund selectors acknowledge ESG filters (dramatically) limit their investment universe, according to Evenco’s latest UK fund selector survey. This latter figure is significantly higher than in some other European countries. Only 16% of Spanish fund selectors and one in five Italians are concerned that applying ESG criteria may restrict the number of funds they can choose from, for example.
Most likely, the difference is due in part to the fact that Mediterranean fund selectors remain significantly less keen on ESG than their UK counterparts. Less than a third of fund selectors in both countries regard ESG criteria as ‘very important’ when selecting a fund, compared to 60% for UK fund selectors.
The ESG attitudes of UK fund selectors are, therefore, more akin to those of their Nordic peers. In the Nordics, the share of fund selectors saying ESG criteria are very important is even slightly higher than in the UK at 62.5%.
Despite their enthusiasm for ESG, London-based fund buyers remain critical. A handful of interviewees lamented the greenwashing practices of some asset managers. “ESG or sustainability is often used as a label in the fund name but nothing in the strategy shows ESG compliance,” one complained. Respondents also believe that especially in fixed income, ESG fund offerings remain too limited.
ETFs remain to be the fastest growing investment type globally and, according to Evenco’s latest UK fund selector survey, 75% of fund selectors uses ETFs in their portfolio construction. When asked if fund selectors use ETFs as part of their core strategy, or hold a satellite position, the responses split equally between those two as well as one third admitted allocating to both. Fifty-four percent invest in plain vanilla solutions, while smart beta has not been too popular with our interviewees.
EQUITIES – POSITIVE ON EQUITIES
It should be no surprise, given recent market gains, that equity sentiment shows a radically different picture, with the exception of US equities where bulls and bears balance each other out. EM equities enjoy the highest popularity, with 69% of respondents being overweight and only 19% underweight. UK equities come in second with a net overweight of 25%, followed by global equities (+26%) and European equities (+7%).
FIXED INCOME – EMD: MARMITE ASSET CLASS
The latter opinion is not all too surprising since 35% of respondents are looking to increase their allocation to emerging market debt (EMD), which happens to be the asset class with the worst ESG credentials overall, and a very limited offering of funds that apply ESG criteria. Despite the relatively high percentage of investors being overweight EMD, net sentiment is neutral as an equally high number are underweight.
The only asset class in fixed income with net positive sentiment is (investment-grade) corporate bonds, with bulls outnumbering bears by a slim five percentage point margin. In government bonds, high-yield debt and UK bonds, sentiment is decidedly negative.
ALTERNATIVES – PREFERENCE FOR LIQUID ALTERNATIVES
The investors we spoke to remain hesitant to invest in illiquid alternatives, with the majority continuing to shun both private debt and private equity funds. Those who do invest in these asset classes have a propensity to be overweight, though. Infrastructure is the most popular of illiquid alternatives, with 35% saying they are overweight and ‘only’ 47% being not invested in the asset class.
UK fund selectors retain a preference for liquid alternatives such as hedge funds and absolute return funds. These fund categories are used by respectively 70% and 82% of respondents, and those overweight clearly outnumber those underweight despite the poor performance of most hedge funds and absolute return strategies in recent years.
Evenco International Research Team hugely enjoyed conducting the interviews that helped us to shape this report. We would like to thank all of those that participated.