Thematic funds pause for breath after market setbacks
By supporting investment in areas such as healthcare, technology and clean energy, a growing number of exchange traded funds promote themselves as delivering rewards to both society and investors.
But the chequered recent performance of many thematic funds has provoked a reappraisal of investor commitment to this expanding investment space.
Many funds boasting environmental, social and corporate governance (ESG) credentials, and other fashionable “future economy” themes, performed well during the earlier days of the Covid pandemic, attracting strong support from investors.
Technology had been the dominant Morningstar subcategory in the thematics space. But the “physical world” category — covering the management of resources and the shift to clean energy — has expanded its presence over time.
But not all anticipate the “ESG-lite”, broad-brush funds fading away. This is because many investors do not wish not to stray too far from conventional index-tracking funds and miss out on potential gains. As Peter Sleep, senior portfolio manager at 7IM, puts it: “A lot of fund managers want to ‘green’ their portfolios without giving up anything on performance”.
But fund providers face more pressure to show that they are diligently applying ESG criteria to portfolios labelled as such. Europe’s recently introduced Sustainable Finance Disclosure Regulation requires funds to categorise themselves according to how committed they are to sustainable investing.
Other watchdogs are also getting in on the act. In September, the UK’s Financial Conduct Authority called for better scrutiny of whether investment products meet their sustainability claims. “We believe that the subjective nature of ESG factors, and how ESG data and ratings are incorporated into benchmark methodologies, give rise to an increased risk of poor disclosures in ESG benchmark statements,” said Edwin Schooling Latter, the FCA’s director of infrastructure and exchanges.
This story originally appeared on: Financial Times - Author:Dave Baxter
