Robo advisers short-circuit over ethical investing
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A rift is emerging between rival robo advisers over the suitability of ready-made ethical investment portfolios, with several platforms arguing that the market is not mature enough to support fully diversified products.
Online “robo” platforms offer a simple way for retail investors to access ready-made investment portfolios, usually made up of passive funds. Providers report growing demand for ESG investments — classified as meeting certain ethical, sustainable and corporate governance standards — particularly among younger investors.
Online investment company Wealthify became the latest to offer investors a suite of off-the-peg ethical portfolios in August. However, rivals including Nutmeg, Moneyfarm and IG claim that the market is still too young to be able to offer reliable and well diversified passive investment portfolios in this area, noting there is no set definition of what an ethical fund or portfolio should do.
Wealthify’s five ethical portfolios — which match different risk appetites — exclude so-called “sin stocks” that engage in activities like gambling and tobacco. Instead, they are weighted towards companies that rank highly in environmental and social criteria, via a range of dedicated ethical investment funds from providers including BlackRock and Kames Capital.
The number of ethical ETFs listed on the London Stock Exchange reached a record high this year, but ESG funds make up just over 3 per cent of the total.
Unusually for a robo adviser, Wealthify’s ethical portfolios contain both active and passive funds, pushing up the average annual fund charge to 0.54 per cent. This is more than double the average 0.21 per cent charged on funds in its mainstream portfolios. The ethical portfolios also contain fewer funds. Wealthify said it had “fewer types of investments at our disposal to make ethical plans”.
This lack of choice is why rival providers including IG, Moneyfarm and Scalable Capital say they are currently unwilling to put together ethical portfolio options.
IG said that while investors were “better served” by sustainable exchange traded funds (ETFs) than they had been in the past, it was very difficult to achieve a spread of suitable equities, bonds and other assets needed to construct a well-diversified portfolio.
“The real difficulty comes in fixed income, where the space is not at all well developed,” said Oliver Smith, IG portfolio manager. “If you want exposure to high-yield bonds, the indices are packed full of mining companies which makes it difficult for investors to get diversified allocations.”
Moneyfarm agreed that while ethical investing was “a definite trend”, there were not yet enough green ETFs to put together a balanced portfolio — a view shared by Scalable Capital, which is backed by investment giant BlackRock.
Scalable Capital said there was not a sufficient spread of green ETFs across a variety of asset classes and regions, and the ethical ETFs on the market had not been around for long enough to provide enough performance and risk data.
Nutmeg, the largest robo-adviser in the UK with more than 60,000 customers, said the subjective nature of ethical investing, and the vast array of definitions used by different fund providers meant it would be too difficult to put together an ethical portfolio to please all customers.
“What constitutes an ‘ethical’ strategy has no set definition and what makes an ethical portfolio for one provider doesn’t necessarily apply for another,” said James McManus, head of ETF research at Nutmeg.
Other robo platforms offering ethical portfolios argued that having a clear and transparent method for selecting ethical funds was more important than having a single definition agreed by all providers.
Providers including Wealthsimple, Moola and PensionBee have all brought out ethical fund portfolios in recent months, some of which have outperformed investors’ mainstream portfolios over the short term.
Investec Click & Invest, which currently offers ready-made portfolios comprising both active and passive funds, said it was considering launching ethical portfolios comprised solely of active funds, where managers would be more likely to take an active role in voting on corporate governance issues.
Overall retail sales of ethical active funds reached £1bn in 2017, a near 500 per cent increase on the volume purchased in 2008 according to data from the Investment Association.
The UK’s socially responsible investment (SRI) market is set to grow by 173 per cent to be worth £48bn by 2027, according to research conducted this month by Triodos Bank.
Triodos’ survey showed that a fifth of investors across all ages planned to invest in a socially responsible investment fund in the coming years, rising to almost half of investors aged 18-34.
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