February 2022

The tension between Russia and the West over Ukraine has been building in recent weeks, and Russia’s incursion into Ukraine has clearly escalated the crisis. We explain why investors should stay calm and why we feel there are good reasons to take an optimistic view.

Likely fallout from the crisis

So far, 2022 has seen investment markets give back some of the gains made in 2021, firstly due to higher levels of inflation, and secondly as a result of the increased tensions between Russia and Ukraine. Whilst most global markets have seen modest falls over the year to date, as ever, it is important to take a rational look at events, and consider the bigger picture for investment markets over the remainder of this year and beyond.

As a direct consequence of the increased tensions, oil prices have climbed, breaching the $100 a barrel mark. Higher energy costs are likely to exacerbate the inflationary pressure in the short term; however, our view remains that inflation will moderate as we head towards the end of the year. Naturally, the higher oil price is likely to benefit oil producers and energy companies generally. Likewise, the imposition of sanctions on Russia and Russian interests by the West could lead to further falls in Russian equities, and the value of the Russian rouble. For this reason, we would recommend investors favour developed markets rather than emerging markets in these conditions.

Reasons to be optimistic

To counter the potential downsides of the increased tension, there are a number of good reasons to be positive despite the newsflow. With Covid-19 restrictions easing around the world, the headwinds from the Coronavirus pandemic are starting to subside, which should allow Western economies to continue to grow over the remainder of 2022. Apart from a small number of recent disappointments such as results announced by Meta (Facebook) and Peleton, corporate earnings have generally matched or beaten market expectations over recent months, and forecasted profits remain strong in many sectors of the economy.

Another reason for optimism is that markets have already fallen back over the last six weeks and may, to some extent, have already priced in some of the potential risk from further escalation of the Russian incursion.

Finally, the increased geopolitical risk could potentially lead central banks to take a more measured view over the pace of interest rates increases over the remainder of 2022. Markets would almost certainly view this in a positive light.

Volatility is part of the process

Global markets are digesting a regular stream of news from events in Russia and Ukraine, which is likely to lead to continued volatility in the short term. Volatility is a measure of how much an asset rises or falls in value over a given period of time, and all of our investment strategies focus on limiting investment volatility over the longer term.

It has been noticeable that volatility has not increased significantly over recent weeks and overall levels of volatility are significantly lower than levels seen at the beginning of the pandemic in March 2020. We see this as a positive sign that market participants are prepared to take a measured view of events.

Learning from the past

Many investors will clearly recall the market gyrations seen at the start of the pandemic just less than two years ago. We counselled clients at that time to stay calm and remain invested through the very high levels of volatility seen at the time. Of course, history tells us that this was a sensible course of action to take as global markets had recovered their losses by the end of 2020.

Similarly, we avoided recommending clients take action to try and trade the volatility seen at the time, and this remains our recommended course of action now. To quote an often used market adage “it is time in the markets, not timing the markets” that produces long-term returns.

Furthermore, investment should always be viewed as a medium to long term process, and investor focus should always remain on the longer term goals and outcome, rather than short term fluctuations in market conditions.

Review your portfolio

Diversification is a key part of our investment process, and for many investors should be a cornerstone of portfolio construction. Holding too much exposure to any one area or asset class can lead to greater than expected volatility, which can be reduced by spreading funds across a range of different assets, sectors and geographies. If your portfolio is not regularly reviewed, our experienced team at FAS would be happy to take an impartial review of your investments, to consider how they are invested and the level of diversification.

Stay the course

From a global security point of view, it is clearly unsettling to see the destabilising effects of the military action. However, when it comes to investment strategy we  recommend that investors remain calm and focused on the wider economic outlook. Naturally, the team at FAS will continue to monitor markets closely as the situation unfolds.

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.

Investing for the future has taken on new meaning in this world of climate emergency, the continuing Covid-19 pandemic, and our growing awareness of how our actions might affect current and future generations. Environmental, social and governance (ESG) concerns now underpin many investment strategies, with the goal of minimising harm to the world and its people while also generating returns.

Investing in line with ESG practices is a rapidly growing area of the investment fund market. UK investors transferred almost £1bn a month on average into responsible investment funds in 2020. By the end of September 2021, the figure was £1.6 bn, up to two-thirds of total net retail fund investment in that month.

UK investors now have £85bn in responsible investment funds. Between September 2020 and September 2021, the sector saw 87% growth (versus 17% across funds overall), according to the Investment Association (IA).  So why now?

Three main factors are behind the move to ESG in the past few years:

• a bigger role by organisations such as the Principles for Responsible Investment;
• an improvement in ESG performance data and investor tools; and
• demand from ‘millennial’ investors, now aged 25 to 41, mid-career, and inheriting the reality of climate change and social unrest (87% of high net worth millennials invest based on a company’s ESG record).

In the last year, the Covid-19 pandemic and the COP26 summit in Glasgow have both led to greater interest in the responsible investment agenda.

Performance

Ethical investing was once positioned as a choice of principles over returns. A shift in global policy and advances in technology mean responsible funds now consistently outperform non-ethical equivalents. So, one of the traditional arguments against investing with conscience has all but disappeared.

Analysis of funds covering 23 comparable sectors found in the 12 months to 1 July 2021:

• Ethical funds had produced an average overall return of 19.87%.
• The average return of funds outside the ethical category was 17.89%.
• At a sector level, ethical funds outperformed on average in 13 of the 23 sectors.

Defining ESG investment

ESG investing is about choosing to consider the treatment of the planet, people and management structures in order to receive financial returns in a way that is aligned with personal ethics and concerns about the world. This may mean:

• avoiding certain sectors;
• excluding specific companies; or
• picking a theme with personal importance and investing in projects trying to achieve particular goals or change.

ESG investing lets investors align the way they use their money with their principles, often as part of a lifestyle of ethical consumerism that considers the supply chain of everything we use, from plastic waste to modern slavery.

Future-proof investing

Global sustainability challenges are forcing us to rethink traditional ways of working and living. Companies that once looked like solid and stable investments now face new risks to their profits, including from:

• food shortages;
• drought;
• rising sea levels and floods;
• conflicts over resources and land;
• data privacy

ESG investing is considered a way of future-proofing returns by investing sustainably, choosing industries concerned for both people and the planet, in order to make long-term profits.

Example: Cleaner energy electric vehicle (EV) sales are expected to grow globally by 27% a year between now and 2030. Add in remote updates to EV functionality and entertainment, and investors get dual returns: consumer demand for less harmful products, and software subscription deals

Your values

Matching investments to your values means deciding what is most important to you. You may need to compromise to achieve all your goals.

The pandemic has made a larger number of investors look at ESG criteria more closely in the context of intergenerational planning and wealth transfer. In a recent survey from Prudential, 61% of participants said they now care more about the environment and the planet than they did before Covid-19. One in five are more worried about ESG issues now they have children or grandchildren.

The report found an increased appetite for ESG investing among:

• 60% of millennials;
• 44% of Gen X;
• 35% of baby boomers; and
• 45% of all investors now only want to invest in sustainable companies and funds.

However more than a third (36%) of UK adults admit they do not know where their current investments, including workplace and private pensions, are invested.

While interest in ESG investing has increased across the board, a generational divide exists over priorities when it comes to choosing investments. Climate change is a more pressing issue for older high net worth individuals, with 55% ranking it their top ESG issue. Social and governance issues ranked lower; only 9% put diversity among their top three ESG concerns.

Younger investors in the 18 – 34 range, however, prioritised social issues.

• 45% said diversity should be companies’ top priority;
• 64% judged companies by their responses to Covid-19; and
• 60% were concerned by unequal financial and social hardship caused by the pandemic.

This divergence of opinion in ESG investing has the potential to cause friction for intergenerational financial planning. A good financial planner can guide you on how best to find compromise for children or grandchildren.

Pitfalls

While ESG investment is currently experiencing a positive surge, as with every strategy, there are some key issues that investors should bear in mind.

To cash in on the ‘green pound’, and jump on the bandwagon of demand for ethical investments, some companies are rebranding as ESG-focused in a way that’s not entirely honest.

Some ESG funds take a liberal view of what they allow to make it easier to achieve returns. This ‘greenwashing’ can make it hard for ordinary investors to choose genuine ESG investments.

Greenwashing can be cynical marketing, or it can be an oversimplified view of a company or sector that fails to take into account hidden ESG risks. Examples include:

• Fishing, once seen as ‘green’ versus meat, is the largest contributor to ocean plastic.
• Soybeans are the second largest driver of deforestation after cattle, a fact largely hidden from investors in ETF indexes.
• The Australian government found modern slavery of Uyghurs in the supply chains of at least 82 well-known global brands.

Remember, just because a company, project or fund is marketed as ESG or ethical or sustainable doesn’t necessarily mean it will turn a profit or achieve anything worthwhile.

How we can help

When researching ethical investment funds for client portfolios, we believe in asking the same clear-headed questions of an ethically focused fund as any other potential investment:

• What is it doing better than its peer group?
• What growth has it achieved and what is it doing to achieve more?
• What problem is it solving and how is it measuring its success at that?
• Is it good value for money?

At FAS we can help you to understand how to translate the values that are most important to you into a suitable ethical investment portfolio that reflects your principles and financial goals.

So, if you wish to create a financial plan based on your wishes to build and pass on long-term, sustainable investment returns to your children and grandchildren, speak to one of our experienced financial planners who can help you to embrace the world of ethical investing.

If you are interested in discussing the above with one of our experienced financial planners, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.