1 year ago

Blue Chip Issue 80

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Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.


RESPONSIBLE INVESTMENT A FIRST FOR SOUTH AFRICA Oliver Jones is an investment analyst in the asset management team at PortfolioMetrix in the UK. He is responsible for the fund selection processes across the PortfolioMetrix Sustainable World range of portfolios. Blue Chip spoke to him about the equity fund that is headed our way. PortfolioMetrix is due to launch a Sustainable World Global Equity Fund in South Africa. Please tell us more. The PortfolioMetrix Sustainable World Global Equity Fund is due to launch in October and is designed for clients who wish to generate a positive social and environmental impact alongside financial returns – in what we believe will be a first for South African investors. We have been running sustainable portfolios for UK clients since January 2017 and have built a strong track record both in terms of financial performance and social and environmental impact. On the back of this success, we are excited about the launch of the Sustainable World Global Equity Fund. What is the strategy and investment philosophy of your ESG portfolios, and will South Africa follow the same philosophy? The Sustainable World approach follows the same investment philosophy and process as all PortfolioMetrix approaches, which starts with asset allocation and then fund selection and portfolio construction. For Sustainable World, we only select funds that embrace sustainability and positive change. This means underlying funds must only invest in companies delivering a clear positive net benefit to society and the environment through their products, services and business operations. This typically leads to funds that adopt a multi-thematic approach, often aligned to the UN’s Sustainable Development Goals. The PortfolioMetrix Sustainable World Global Equity fund will also follow this approach and, when launched, will use the same underlying equity funds as our UK and European Sustainable World portfolios. What are the different philosophies around ESG investing and what is PortfolioMetrix’s viewpoint on these? At PortfolioMetrix, we view sustainable investing as having three techniques: Positive Screening, Negative Screening and Engagement. Positive Screening is where a fund ensures it only invests in companies that positively impact people and the planet by defining sustainability themes and ensuring its investments impact one or more of them. An example of a theme is cleaner energy, which would make Ørsted, an offshore wind farm operator, eligible for possible investment. Negative Screens ensure the worst companies from a sustainability perspective are avoided. These often include sin stocks such as adult entertainment, gambling, controversial weapons and alcohol, and can apply to countries or industries. Engagement is the process of identifying areas where companies can improve, and then working with them to drive positive change in their businesses. Typical areas for engagement include gender diversity and carbon emissions. 38 At PortfolioMetrix, we believe what you do invest in is the most powerful way to support the transition to a more sustainable future. For this reason, we focus on positive screening and engagement in Sustainable World as this ensures the fund invests in companies providing real, tangible solutions to sustainability challenges. Why has PortfolioMetrix adopted an integrated stewardship and ESG approach to responsible investing? PortfolioMetrix integrates stewardship and ESG into its investment processes as ESG considerations form part of understanding all risks and opportunities a company faces in attempting to maximise long-term risk-adjusted returns. This commitment is incorporated in our Responsible Investing Policy. How does PortfolioMetrix put this policy into practice? Our responsible investment policy means we evaluate the responsible investment policies and processes of the funds we invest in, only use funds that demonstrate sufficient stewardship, and prefer funds that demonstrate superior ESG integration in their investment process. Why is it difficult for passive funds to undertake positive screenings? Is this why a tilt towards passives decreases the level of ESGs in PortfolioMetrix’s portfolio? Implementing positive screens requires an in-depth knowledge of a company’s products, services and business operations to understand how that company impacts society and the environment. This process is qualitative as the data provided by companies is never comprehensive and often difficult to interpret. Unfortunately, passive funds are reliant on this data and therefore are not able to implement positive screens well, if at all. We therefore believe that sustainable investing is an active management process and the use of passive funds, while cheaper, are less impactful. Entering the ethical investing arena is complex for financial managers. What advice do you have for them? It is important to understand what impact you wish to generate from your investments, and then select an investment that best meets those requirements. At PortfolioMetrix, we feel it is crucial to be clear with the goals of Sustainable World, to allow investors to decide whether it is appropriate for them. The biggest misconception has been that you must sacrifice returns to invest sustainably. However, there is no evidence to confirm this, but we do expect short periods of out – and underperformance versus agnostic strategies given there are areas of the market sustainable strategies do not invest. Oliver Jones, Investment Analyst, PortfolioMetrix

TECHNOLOGY The Goldilocks Zone Have we prioritised scaling over smiling? You either fall into the camp that grew up with and who love technology (aka digital natives) or you fall into the camp where you feel that the pain of mastering a new tool most likely outweighs the potential benefit. The love-it or love-to-hate-it camp. It is completely normal to feel frustrated by technology. In a recent report on business efficiency by PortfolioMetrix, technology frustrations ranked in the top four concerns for financial planners. It is fascinating that the same tools can be loved by some and hated by others. How much time do we really give to understanding why we are implementing something in our financial planning business? Technology has been used as the go-to answer for any business roadblock, expecting that we can provide our team or clients with a new tool and that will solve almost any problem. I count myself among this group as a lover of technology, automated processes and efficiency. The question of “can’t we just have one tool that does everything” screams the need for efficiency. This efficiency almost always comes at the cost of client experience. In a report by Matthew Jackson, titled New Frontiers in Wealth Management, he unpacks the concept of using technology to create a better client experience as opposed to creating additional efficiency. It is not difficult to find a practice management consultant that speaks about the service constraints that financial planners experience resulting in a limited client base and a limited revenue stream. What if we considered technology as a key ingredient to improve client experience, potentially at the cost of efficiency? Shifting the focus from scalability to remarkability. Creating a remarkable experience, something Seth Godin would call the “Purple Cow”. If your experience with your financial planners is so remarkable, this becomes an opportunity to share the experience with friends and colleagues and can become a powerful marketing engine. A term coined as “surprise and delight”; looking for any opportunity to bring a smile to the face of your client. 39

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