Objective-Based Investing
Most model portfolios are designed purely to meeting a specific level of risk.
While risk appropriateness is a key factor of any investment strategy, a portfolio built like that means (to us at least) that the reason WHY you are investing could be forgotten. That makes no sense. No-one has ever asked for investment advice because they want to be a medium-risk investor! But you, and every client we’ve met over the years we worked as an Independent Financial Adviser (IFA), has had a goal for the investment they are making, be it saving for retirement, supporting a grandchild through school or university, paying for their child’s wedding, taking the holiday of a lifetime, or simply leaving an inheritance for their loved ones.
We all have needs, hopes, and dreams, and that is what you are asking for help to achieve.
A 30-year-old building their pension pot could easily be assessed as having the same risk tolerance as a 65-year-old who is drawing an income. But that is no reason for having the same investment portfolios. One needs income, the other does not. One needs elevated levels of volatility to generate long term growth possibilities and to benefit from ‘pound cost averaging’, while the other needs capital stability to support withdrawals.
To us, it makes more sense to focus on the reason why you are investing and design an investment model to support objectives across differing risk levels. We leave the proper combination of those two things to you and your adviser, as you are the ones who understand you and your circumstances best.
Only an IFA-centric Discretionary Fund Manager (DFM) would provide a structure to allow this type of investing, and we do this with our propriety Asset Allocation Tool (or PEG, as we like to call it!).
Client-Focused Asset Allocation Tool (PEG)
PEG runs on most large devices and supports you and your IFA in a discussion about your investment objectives, as well as your risk tolerance and capacity for loss. The outcome of this discussion provides you both with a market-average asset allocation based on your risk tolerance, which can be used with any provider your IFA considers suitable for you.
If your IFA thinks that using Trust DFM is suitable, you can continue to the next stage where PEG combines your investment objectives with your risk assessment in a simple interface. This clear visual representation allows you to see the relationship between the two, to help you understand WHY your IFA might make certain recommendations to you. So now you can have a real conversation about risk and how it affects your investment goals!
What is ESG?
What is ESG and why have these three letters become a buzzword?
In almost all investment sectors you will hear the term ESG. These three letters have come to embrace a broader meaning than simply the terms they represent, which are Ethical, Socially Responsible (or Sustainable), and Governance. But how and why should this impact the world of investing?
All businesses in the world have ESG characteristics and these are some of the ways in which they can be measured or assessed:
Environmental factors refer to how companies are performing in their stewardship of the environment. Examples of this are:
- Carbon footprint
- Energy consumption
- Greenhouse gas emissions
Social factors consider how companies manage their relationships with employees, suppliers, customers, and the population in areas where they operate, for example:
- Human rights and social justice
- Working conditions and employee relations
- Health and safety standards
Governance factors focus on company leadership, which include:
- Board diversity, structure and pay
- Anti-bribery and anti-corruption policy
- Management and culture
It is important to understand that ESG is just a way to measure these separate issues. Just because an investment or a company has an ESG policy doesn’t mean that they are ‘green’ or ‘ethical’ or ‘sustainable’, and this is the most common misunderstanding of the term ESG.
When Fund Managers are deciding which companies to invest in, they may search out and include companies based on their ESG characteristics, like those listed above. ESG investing may be referred to by other terms such as “socially responsible investing”, “sustainable investing”, or “ESG integration”, depending on the different methods of assessing the ESG characteristics the Fund Manager might use. Methods like exclusion, or inclusion screening. An exclusion screen identifies areas where the fund manager does not want to invest, for example, weapons manufacturers or gambling firms, and removing them from consideration. Inclusion screening looks for firms which exceed a certain ESG standard such as, developing green energy or high levels of equality and diversity amongst the workforce and management.
ESG investing matters because it allows you to measure how investments reflect the values that are important to you, by focussing on related ESG characteristics in the investment solutions that you use.
What is “Greenwashing”?
You may have come across the term ‘greenwashing’ in the news or articles relating to ESG investments. Greenwashing is the process by which people design products to look ‘green’ or ‘sustainable’ when they are really doing nothing different to what they have done before. Effectively using the term ESG as a smoke screen for a lack of action when it comes to investments that protect rather than harm the planet.
The financial services sector can act as a force for good in this area, where institutions large and small can use their business decisions, their innovation and their voice, to encourage positive change. But when firms undermine the confidence of the public in this way, it leads them to question the integrity of all the great work that is really being done. To help prevent this in the future, the Financial Conduct Authority (FCA) issued an open warning in July 2021 to investment management firms on ‘greenwashing’, and they are also developing a clear set of guidelines for ESG investing in the coming months and years.
But we don’t want to wait to start making an impact, and so we’ve sought out our own guidelines and identified the principles that we want to uphold when we’re investing, with a view to improving what we can in the world and society around us. We’ve identified the European Union (EU) financial regulation known as the Sustainable Finance Disclosure Regulation (SFDR), Articles 8 and 9, as the measurement of what ESG will mean to us. In addition, the work of the widely respected broadcaster, biologist, natural historian and author David Attenborough and the innovative economist Kate Raworth will provide our guiding principles.
Attenborough and Raworth
In his book ‘A Life On Our Planet’ David Attenborough says:
“In a sustainable world…our banks and pension funds would only invest in sustainable businesses’
He believes that there needs to be focus on five separate areas to make a real difference:
- Control of population growth
- The use of renewable energy
- Focusing on re-wilding the planet
- Reducing and reversing deforestation
- Moving to a plant-based diet
This seems straight forward in practice, but how do we implement these things when developing your investment portfolio?
Fortunately, someone has already done a great deal of detailed work for us, by Professor Kate Raworth, and this is discussed in part three of Attenborough’s book.
Kate Raworth is an economist at Oxford University’s Environmental Change Institute who has designed a structure that promotes and supports Attenborough’s five principles. The structure is called Doughnut Economics and she can be seen presenting it at TED. You can watch that presentation by going to this link:
https://www.ted.com/talks/kate_raworth_a_healthy_economy_should_be
designed_to_thrive_not_grow?language=en
Copyright © Kate Raworth 2017
In Raworth’s work and in her excellent book ‘Doughnut Economics: seven ways to think like a 21st century economist’ she covers nine areas that we need to focus on to support everyone in the global society and protect the planet that we all rely on to exist.
How is TRUST DFM different?
There are a wide range of ESG style portfolios available in the market today, but at Trust DFM we have gone one step further along the ESG investment journey and built portfolios that focus more heavily on the environment and creating a circular economy than a typical ESG fund. The key differentiator between Trust DFM portfolios and general ESG portfolios is their focus on sustainability.
The term sustainability is notoriously difficult to define, so we use the definition as set out in the EU financial regulation known as the Sustainable Finance Disclosure Regulation (SFDR). This regulation not only provides a definition but requires fund managers to disclose how they approach sustainability in their portfolios.
These regulations define sustainability as either:
- Article 8: Promoting environmental or social characteristics and meeting minimum standards of governance. Or
- Article 9: Sustainable investing as an objective and where investments must be assessed against the “do no significant harm” principle. The “do no significant harm” principle can be summarised as ensuring that activities which make a substantial contribution to one objective, carbon emissions for example, must not cause any significant harm in the other social or environmental areas. It is vital to understand that no company is 100% sustainable and all do some harm. But by considering these issues, fund managers are helping to drive change in the companies they invest in.
Article 8 funds are often known as “Light Green” and Article 9 funds are often known as “Dark Green”. Typically, the latter will identify companies which are facilitating or accelerating the move towards net carbon zero as well as addressing social need.
At Trust DFM we prefer funds which sit in the sustainability themed box (marked in green below) and focus on funds that have the Article 8 and Article 9 designations. Fund managers which have this designation must prove their sustainability credentials which, in turn, allows us to make sure they are doing what they claim they are.
A key part of our investment strategy is fund manager engagement. We meet with managers regularly and make it our business to be well informed, engaging with thought leaders outside the industry as well as within. These meetings ensure that we can hold fund managers to account regarding investments and their environmental impact. All fund managers that are selected actively engage with management of the companies they invest in. As Trust DFM grows, it gives us more influence on companies when it comes to how they deal with the protection of the planet.
The beginning of a journey
Investing in sustainable funds is a relatively new concept and as such we are at the beginning of a journey, with much to do as we move forward. There are no funds that can justifiably claim to save the planet, but by focussing on investing sustainably we can help companies to improve the world around us.
Fund managers are seeking to invest in the industries of the future, focussing on more sustainable, long-term businesses as they do so. Many traditional, more established businesses will also profit from this change. There is a lot of optimism about the potential for these businesses but there will still be times when older, more heavily polluting businesses, particularly Oil and Gas companies, will outperform these investments. Because our Trust DFM Attenborough Range requires a fossil fuel exclusion policy to be effective, or a commitment not to invest in fossil fuel producers, when those types of companies do well, performance will take a back seat against the sustainability principles which guide us.
Companies delivering solutions to the environmental and social problems of our world are located globally. So, investors should expect to see more volatility than a typical fund. However, over the longer term, we should expect strong returns as these new industries grow and spread the benefit of their solutions to the rest of society.
The Attenborough Scale®
If you want to invest in portfolios that have sustainability (as defined by the SFDR) at their core, then our Trust DFM Attenborough range could be the right choice for you. You may not be ready to invest 100% into this range right now, perhaps because of your own circumstances, or perhaps because of the short track record of the type of investments that we’re using. So we’ve introduced a way to make the transition to the ‘Dark Green’ investment style easier.
Investing anything from 10% to 100% of your assets is possible, the choice is yours, and we call this style of mixing the standard and Attenborough range of investments, ‘The Attenborough Scale®.’
You decide how far up the scale you want to go, and we combine the portfolios for you so that they represent a level of engagement with ethical investing that feels right for you, and still meets your investment objectives and appropriate levels of risk and volatility.
The investments will still be actively managed day to day. The only difference is the actual investments that are used, which may perform very differently because of their sustainable characteristics.