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Investments

Responsible, Sustainable and Impact Investing

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Wells Gibson remains a strong advocate of systematic, evidence-based investing as this continues to stand the test of time and remains a robust, well thought through proposition which investors can understand and stick with, even in challenging market conditions.

For some time now, we have been eager to complement our standard investment proposition with the development of an ESG investment proposition and an Impact investment proposition. These are described as follows:

ESG investing has an increased focus on environmental risks (E); social sustainability (S); and good governance (G); and

Impact investing helps drive solutions to global problems and provides a material effect on important positive outcomes with regards to social sustainability and environmental risks.

The focus of this article is the development of our ESG investment proposition, and a further article will follow with regards to the development of our Impact investment proposition.

The Spectrum of Capital is a helpful diagram which summarises the financial goals and impact goals of different investment approaches, and you will notice this places a broad-based, traditional investment approach at the left-hand side, and, philanthropy at the other side. Wells Gibson’s standard investment proposition would fall into the traditional column i.e. the left-hand side.

Thanks to, UK National Advisory Board On Impact Investing, 2017 & Impact Management Project, 2017

Our ESG Proposition

Wells Gibson has now created an investment proposition which has an increased focus on ESG factors and includes funds whereby the investment approach is deemed to fall into the Responsible & Sustainable columns within The Spectrum of Capital.

We have sought to address the issues that are most important to environmentally focused investors, without compromising on sound investment principles, or requiring investors to accept lower expected returns.

Although this proposition has an increased focus on ESG factors, we will not compromise on the structural integrity of our portfolios because this can expose an investor’s capital to unwanted and unnecessary risks.  In other words, we are determined to apply our systematic, evidence-based philosophy to our ESG proposition.

We recognise there is no ideal single approach to ESG investing.  A number of offerings are continuing to develop such as negative screening; positive screening; a focus on the environment only; and a combination of E, S and G etc.

Our ESG Portfolios

In order to create portfolios with an increased focus on ESG factors, we consulted with Albion Strategic Consulting which provides Wells Gibson with ongoing governance oversight and is a member of our investment committee.

Using Wells Gibson’s standard, traditional portfolios as a sound template, our approach initially is to replace the existing funds used to obtain global, developed market equity exposure, with two new funds which stand out as being worthy of inclusion and are from investment firms we are very familiar with and trust, Dimensional and Vanguard.

We believe the rules based ESG approach of these funds is a step in the right direction, without materially sacrificing capital market returns:

The Dimensional fund [1] claims to reduce greenhouse gas emissions intensity by over 60%, and nearly 99% of emissions from reserves due to the systematic ESG weighting methodology; and

The Vanguard fund [2] excludes companies that do not align with the UN’s Global Compact principles.

As with our standard, traditional portfolios, the ESG portfolios will also invest in global short-dated bonds; global commercial property; and global emerging markets, however as new products emerge, these will be scrutinised before any decision is made to include them in our ESG portfolios.

We asked Albion to run an analysis comparing Wells Gibson’s standard, traditional portfolios to Wells Gibson’s ESG portfolios and this revealed:

A minor increase in cost;

A minor increase in share concentration; and

A minor reduction in the expected return (attributable to the reduction in allocation to small and value companies).

Our conclusion is that Wells Gibson’s initial ESG investment offering provides a meaningful and worthwhile progression towards a full ESG portfolio and will be used when requested by clients.

We continue to develop our Impact investment proposition and as soon as we have a viable solution, we will let you know.

Please don’t hesitate to contact Wells Gibson if you have any questions and if this is an area you would like to discuss please get in touch.

Long-term Investors: Please Don’t be Dismayed by a Recession

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Although we are bombarded by news telling us we are about to enter a recession, don’t be dismayed – remember, investing is a long-term pursuit and is not about speculating to make short-term wins.

With activity in many industries sharply curtailed in an effort to reduce the chances of spreading the coronavirus, some economists say a recession is inevitable, if one hasn’t already begun.1

From a market perspective, we have already experienced a fall in equities, as prices have likely incorporated the growing chance of recession – in fact, it’s often said the market is ahead of a recession.

Investors might be tempted to abandon equities and go to cash because of perceptions of recessions and their impact.  However, across the two years that follow a recession’s onset, equities have a history of positive performance.

Data covering the past century’s 15 US recessions show that investors tended to be rewarded for sticking with equities.

The chart below shows that in 11 of the 15 instances, or 73% of the time, returns on equities were positive two years after a recession began.  The annualized market return for the two years following a recession’s start averaged 7.8%.

Recessions understandably trigger worries over how markets might perform however history can be a comfort for long-term investors who are wondering if, now is the right time to move out of equities.

Remember, “the stock market is a device to transfer money from the impatient to the patient.”

Please do get in contact if you have any questions.


Downturns & Upturns

Growth of wealth for the Fama/French Total US Market Research Index

 

Past performance, including hypothetical performance, is not a guarantee of future results.

CHART

In USD.  Performance includes reinvestment of dividends and capital gains. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.  Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant Recession Start Date. Sample includes 15 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to December 2007. NBER defines recessions as starting at the peak of a business cycle.

GLOSSARY

Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American Depositary Receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

FOOTNOTES

1 Nelson D. Schwartz, “Coronavirus Recession Looms, Its Course ‘Unrecognizable,’” New York Times, March 21, 2020; Peter Coy, “The U.S. May Already Be in a Recession,” Bloomberg Businessweek, March 6, 2020.

Photo by Tommy Tang on Unsplash

A Cut to the Premium Bond Prize Pot

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Savers in the current low-interest-rate environment face a fresh blow after National Savings and Investments (NS&I) announced a cut to their rates.

 

NS&I customers, including Premium Bond holders, will receive lower returns from 1st May 2020 onwards.  According to the Treasury backed savings provider, rates are to be cut after the organisation failed to meet its income target.

 

For Premium Bond holders, the chances of winning a single prize will fall from 24,500/1 to 26,000/1.  The odds-on Premium Bonds will fall as the effective interest rate used to calculate the prize pot is cut from 1.4% to 1.3%.  It’s a big deal for the approximately 22 million people who, between them, own 70 billion Premium Bonds.

 

Despite a lengthening of odds and lower overall prize fund, Premium Bond holders will still have a chance to win one of two £1 million top prizes each month.  Other Premium Bond prize categories, which range from £25 to £100,000, will have fewer winners from 1st May onwards.

 

The cut in prizes and the effective interest rate means Premium Bonds will mean an estimated 13,448 £100 prizes will be won in May, down from 27,221 prizes this month.

 

The interest rate cuts at NS&I arise because savers are less willing to place money with the state-backed organisation.  They also need to remain competitive in line with other savings providers.

 

Ian Ackerley, NS&I chief executive, said;

 

“Reducing interest rates is always a difficult decision.  We need to ensure our interest rates are set at an appropriate position against those of our competitors.

 

“These changes reflect NS&I’s requirement to strike a balance between the needs of our savers with taxpayers and the stability of the broader financial services sector.

 

“We believe our new rates offer our customers a fair return and the assurance of the 100 per cent HM Treasury guarantee on all their holdings with NS&I.”

 

Other NS&I products facing an interest rate cut include the Direct Saver account.  Interest on this account will fall from 1% to 0.7%.

 

Savers with NS&I Income Bonds will see their interest rate cut from 1.16% to 0.7%, and savers in the Investment Account will experience a rate cut from 0.8% to 0.6%.

 

Interest rates for new Guaranteed Growth Bonds, Income Bonds and Fixed Rate Savings Certificates also face cuts, with interest rates falling by as much as 0.4% depending on the selected term.

 

From a Wells Gibson perspective, although the NS&I rate cuts are disappointing, it’s important savers and investors don’t rely on cash to provide a net return above inflation but rather for short-term expenditure needs, perhaps within the next 3 to 5 years.

 

If savers and investors are seeking a real return above inflation, and can invest for at least 5 years, their portfolio ought to include stocks, shares and property.