Facing up to ethicalinvestment
There are many definitions of
what exactly ethical investing is; in
essence it is the use of non-financial
preferences which individuals and
investment professionals use to
guide their investment selection. One
investor’s perception of an ‘ethical’
investment may be very different from
another and so the use of ‘negative
screening’ to exclude unethical
companies (e.g. defence or tobacco
production) is increasingly being
seen as a crude methodology on its
own. In its place the use of ‘positive
screening’ and environment, social
and governance (ESG) factors is
being recognised as a way to highlight
investments that may have a better
chance of generating positive long
term risk adjusted returns and fulfilling
individual ethical criteria.
Thanks to real time information
today’s consumer is much
better informed and has become
highly engaged on how products
and services are sourced and
provided. Not only are ethical
preferences driving consumer
behaviour in the real economy
but also within financial markets.
According to Bloomberg data
assets under management being
run in Environmental, Social and
Governance (ESG) funds has grown
from US$292bn in 2013 to US$446bn
in 2017. Due to the nuance of
definition this may dramatically
under estimate total ESG assets but
the trend is undeniable.
This trend is set to continue thanks
to demographics; according to
a recent YouGov poll, millennial
savers are twice as likely as older
generations to want their pension to
be invested responsibly. According
to the research conducted last year,
13% of 18 to 34 year olds with a
pension think it is their responsibility
to ensure their money is invested
ethically compared with 6 per cent of
45 to 54 year-olds and 7 per cent of
over-55s.
Ethical investment returns
Ethical investing has its critics
and misconceptions with the
main fear focused on the process
leaving investors with a restricted
investment universe and the
potential opportunity cost on
investment returns. However there
is increasing academic evidence(i)
to counter this. Clark, Feiner &
Viehs argues there are strong and
increasing relationships between
ethical/sustainable business
practices and corporate economic
performance. This should not
come as a surprise and according
to Jonathan Yousafzai, Head of
Ethical Investing at Thesis Asset
Management “companies that are
forward-looking, innovative, focused
on the delivery of economic, social
CONTINUED ➤
Companies that are forward-looking, innovative, focused on the delivery
of economic, social and environment improvements should ultimately be
better stewards of shareholder capital.
(i) Clark, Feiner & Viehs - From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, 2015
ThesisMarketCommentary
� August 2018 �1
CONTINUED
Thesis Market Commentary
and environment improvements should ultimately be
better stewards of shareholder capital”.
The chart (Figure 1) illustrates the relative performance
of the MSCI Social Index vs the S&P 500 as you can see
the social index has outperformed over the long term.
The power of ESG analysis
Back to the developed markets the recent events at the
US listed social media company Facebook throws up an
interesting example of a company which on the face of
it (no pun intended) should clear an ethical screening
process but may be disqualified if further ESG analysis
is carried out. Since the Cambridge Analytica scandal
in April 2018 the investment community has started to
question if the company’s current business model is truly
sustainable. The core earnings of Facebook are driven
by on-line advertising whereby through analysis of huge
amounts of customer data (freely given by Facebook
customers) Facebook helps advertisers more accurately
target advertising campaigns.
The Cambridge Analytica scandal throws into question
Facebook’s social contract with its customer and indeed
its social licence. The saying: “If you are not paying for
it, you’re not the customer; you’re the product being
sold.” Has made customers reassess their relationship
with the company.
As one can see from the chart (Figure 3) Facebook has
been a very strong performer relative to the overall
US market (S&P 500) since the company listed in May
2012 but as investor anxiety has increased so has the
company’s stock volatility.
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Figure�1: Historic Outperformance of the MSCI Social Index vs S&P 500 2008 - 2018 (10 years)
Figure�2: Historic Outperformance of Emerging Market ESG Leaders Index 2008 - 2018 (10 years)
Figure�3:� Facebook Share Price v the S&P 500 2013 - 2018 (5 years)
Such outperformance of ethical strategies is not limited to
developed markets it is a global phenomenon, indeed the
outperformance of the MSCI Emerging market benchmark
vs MSCI Emerging market ESG benchmark is arguably more
pronounced. Please see this illustrated in the chart (Figure 2).
� August 2018 �2
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SOURCE: MSCI
SOURCE: MSCI
SOURCE: MSCI
n MSCI Emerging Net Total Return USD Index
n MSCI EM ESG Leaders Net Total Return Index
n FB US Equity – Last Price
n SPX Index – Last Price
CONTINUED
Thesis Market Commentary
Bill Gates during deposition in August 1998
(Photo: Stills from videotape of Bill Gates'
deposition at 1998 United States v. Microsoft trial)
Mark Zuckerberg testifies before congress on 10 April 2018
(Photo: AP)
Microsoft’s experience
highlights the power that
ESG analysis can have on
identifying business that
fail to champion sustainable
business practices
development company, GitHub Inc.
Historically Microsoft aggressively
defended its software licenses and
saw open source developers as a
threat, via the GitHub acquisition
Satya Nadella stated that it
would “Strengthen [Microsoft’s]
commitment to developer freedom,
openness and innovation”. A real
departure from the company’s DNA
under the prior leadership of Bill
Gates and Steve Ballmer (CEO from
January 2000 to February 2014).
It is too early to tell if the recent
missteps at Facebook will lead to
longer term underperformance but
Microsoft’s experience highlights
the power that ESG analysis can
have on identifying business that fail
to champion sustainable business
practices and thus may face
headwinds to its corporate economic
performance going forward.
At Thesis our Ethical Investment
specialists, headed by Jonathan
Yousafzai, have over 60 years of
experience in researching, analysing
and monitoring ethical portfolios
on behalf of our clients. Our ethical
service is run on a bespoke basis
allowing each client to customise
their portfolios as much (or as little)
as they desire depending on the
strength of one’s personal values.
We believe ethical investing does not
have to be mutually exclusive with
long term investment returns but
consideration regarding performance
vs non ethical benchmarks is
necessary.
This is not the first time
a technology company
has experienced concerns
around its social impact and
governance that coincided with
the underperformance of the
company’s stock price. In 1998
the US Department of Justice
accused Microsoft Inc. of violating
the Sherman Act on the grounds
that they held a monopoly and
were engaging in anti-competitive
practices to force customers to
use its operating system and web
browser on Intel based personal
computers.
During Mark Zuckerberg’s recent
testimony in front of Congress
Utah Republican Sen. Orrin Hatch,
pointed out the historic similarity:
“Well, in my opinion…this is the
most intense public scrutiny I’ve
seen for a tech-related hearing
since the Microsoft hearing that
— that I chaired back in the late
1990s.”
The importance of a company’s
culture on its market value can
be seen by the performance of
Microsoft since Satya Nadella
became CEO in 2014 when he
started to transform the company
culture.
Microsoft’s transformation is
exemplified by its recent acquisition
of the open source software
TimHarman
InvestmentManager, Guildford Office Email: [email protected]
� August 2018 �3
Thesis Market Commentary
Indices Value�as�at�31/07/2018
%�Change��on�month
%�Change�2018�year��
to�date
%�Change�on�12�months
FTSE100Share 7748.76 1.46% 0.79% 5.11%
FTSEAllShare 4253.31 1.22% 0.75% 5.12%
S&P500 2816.29 3.60% 5.34% 14.01%
Dow Jones 25415.19 4.71% 2.82% 16.10%
EuroStoxx50EUR 3525.49 3.83% 0.61% 2.21%
Nikkei225 22553.72 1.12% -0.93% 13.19%
MSCIEmergingMarkets 1087.46 1.68% -6.13% 1.99%
UKTreasury4.25%2027 125.60 -0.59% -2.33% -2.85%
Sterling/US$ 1.31 -0.53% -2.96% -0.50%
Sterling/Euro 1.12 -0.66% -0.23% 0.50%
SOURCE: BLOOMBERG
Julywasamoreencouraging
month,withmanyequityindices
aroundtheworldrecording
modestgainsandbouncing
backfromlossesinJune.
Chinesemarketshowever
continuedtounderperform,
weigheddownbythethreatof
tradetariffsaswellasweaker
economicdata.
UK
Whilst Brexit remains the elephant
in the room, Sterling continues
to act as a shock absorber for
the equity market as renewed
weakness fed through into earning
upgrades, particularly for the large-
cap overseas earners. There was
however a hint of change in market
leadership as the commodity sectors
were weak, particularly mining,
and the sectors that fit into the
defensive basket, such as Tobacco
and Consumer Staples performed
better. British American Tobacco and
Reckitt Benckiser in particular, had
positive quarterly results, further
accentuating this effect.
US
President Trump is never out of the
headlines and July was no different,
with a trip to Europe to visit its
political leaders, irregular updates
on his tariff strategy and direct
criticism of his own central bank’s
monetary tightening and its role
in the strengthening of the Dollar.
Whilst such events can be nervy, we
continue to focus our attention on
the strong company results, ongoing
strength in employment and resilient
economic activity. The US economy
actually just recorded its strongest
pace of growth since 2014 at 4.1%
and a number of key economic
indicators remain encouraging. The
ISM manufacturing index increased
from 58.7 to 60.2 and the three-
month trend in job additions remains
above 200,000, suggesting a robust
hiring backdrop.
Eurozone
Most European economies have
experienced a slowdown since last
year, but growth is still strong by
historic standards. A combination
of high business and consumer
confidence, falling unemployment,
gently rising wage growth and
supportive financing conditions
should see domestic spending fare
well on the whole. In fact demand
for consumer credit increased at
its fastest pace in nearly two years,
and points to annual household
consumption growth rising from
1.6% in the first quarter of 2018
to around 2.5%. Mario Draghi,
President of the European Central
Bank reiterated his positive view,
while keeping interest rates and
accompanying message the
same as last month, which means
quantitative easing will wind down
into the end of the year and interest
rates will likely rise but not until the
summer of 2019 at the earliest.
CONTINUED ➤
Summary
Equitymarketsweregenerallyhigher
RenewedSterlingweakness
RobustsecondquartereconomicgrowthfromtheUS
BankofJapan’smonetarypolicymeeting
Governmentbondyieldswerehigher
� August 2018 �4
NEWS&VIEWSCONTINUED
Thesis Market Commentary
Japan
The Bank of Japan’s (BoJ) policy
committee meeting generated a few
days of intense speculation and the
Yen was in focus following leaks the
BoJ may tweak its current bond and
equity buying program. Members of
the BoJ expressed concerns that the
current program was unsustainable.
At the 31 July meeting, the BoJ
announced it will allow greater
flexibility in its bond buying program
and allocate more of its ETF buying
to the Topix from the Nikkei. The
changes however denied previous
speculation that the bank would
remove its present lid on 10-year
yields, a move that would have most
likely steepened the yield curve,
helping bank profits and therefore
improving the flow of credit into the
economy.
Emerging Markets
Chinese equity markets were under
pressure as trade relations between
the US and China deteriorated
further which is raising concerns
about slower future growth rates.
The Chinese response has been
both rapid and significant, easing
monetary policy and providing a
fiscal boost to offset the potential
future risk to growth. We remain
cautious as we head towards the
US mid-term elections in November
as it is unclear how potential trade
policies will play into the political
rhetoric. Other emerging markets
equities staged a rebound in July,
led by Latin America as Brazil and
Mexico posted strong gains on easing
domestic political concerns.
Fixed Income
Government Bonds yields were
higher (prices lower) over July,
having mostly moved sideways
in June. US, Euro and Sterling
corporate bond markets all posted
positive returns however and amid an
improvement in sentiment, high yield
outperformed investment grade.
Commodities
Crude oil was volatile during
the month as President Trump
threatened his Iranian counterpart
via a Twitter message and OPEC
announced supply increases. Copper
prices fell sharply, particularly into
the end of the month, to hit year-to-
date lows after economic data from
China suggested slowing economic
growth and rhetoric around trade
wars continued. The copper price
is closely watched by market
participants because of its ability
to predict turning points in the
global economy, so the recent falls
are being monitored closely for any
further deterioration.
At the 31 July meeting,
the BoJ announced it will
allow greater flexibility in
its bond buying program
and allocate more of its ETF
buying to the Topix from
the Nikkei.
Important� Information This update is for information only and is not an invitation to engage in investment activity. Issued by Thesis Asset Management Limited, Exchange Building, St John’s Street, Chichester PO19 1UP. Authorised and regulated by the Financial Conduct Authority (registration number 114354). Investors should be aware that the value of their investments and the income from them can fall as well as rise and they may not receive back the full amount they invest. Past performance is not a guide to future performance. Investments denominated in foreign currencies are subject to fluctuations in exchange rates which can be favourable or unfavourable. TAM1808_11.
RyanPaterson
ResearchAnalyst Email:[email protected]