Free | Investment Ideas

As our values change, so does the investment product market

The investment product market has evolved over the decades to cater to a wide range of investor needs and objectives. Now, as more and more investors wish to see their portfolio align with their values, the product market is evolving once again to deliver a range of responsible investment solutions.

Lonsec has observed a significant increase in demand for responsible investment solutions over the past two years. Combined with this we have seen a proliferation of investment products adopting ESG, sustainable or impact investing principles within their investment processes. This product evolution has extended beyond equities and now covers most key asset classes, including fixed interest and infrastructure.

We expect the range of products across asset classes and investment structures (i.e. managed funds and ETFs) to continue to grow. The increased demand and subsequent growth in available products have allowed portfolio professionals like Lonsec to construct a diversified investment solution to cater to this market, which was not possible even two years ago when most products were focused primarily on equities.

We believe that the increasing demand has been driven by two key factors that have been instrumental in shifting responsible investing from a niche market to one where there are clear structural tailwinds supporting the adoption of responsible investment solutions.

The first has been a clear change in investor values. Investors are increasingly incorporating their own views on issues such as the environment within their investment decision-making process. While this is not a new phenomenon, it has taken on a new life over the past two years as we see more millennials enter the investment landscape. This is a generation that has been acutely aware of environmental and social issues throughout their lives and believe everyone has a role to play in improving the world, including through their individual investment decisions.

In a 2018 survey of high-net-worth millennials published in US Trust’s Insights on Wealth and Worth, 87% of respondents considered a company’s ESG track record an important consideration in their decision about whether to invest or not. Then you have natural disasters like bushfires—still fresh in Australians’ minds—which have prompted us to become more aware of the type of investments we want exposure to and which we want to avoid. Of course, it’s not just millennials driving this shift. Investors of all ages—from those entering the workforce to those nearing or in retirement—are proactively seeking investments that they believe will benefit future generations.

The second driver for increased demand has been changes in financial adviser behaviour as a result of the Future of Financial Advice reforms of 2012 (FOFA) and subsequently the Royal Commission into the financial services industry, which delivered its final report in 2019.

Focus on best interest duties and the need for advisers to be able to provide advice specific to investors’ needs has been instrumental in focusing adviser attention to responsible investing. In a June 2020 paper ‘Building Stronger Client Relationships with Responsible Investing’, Franklin Templeton noted that 88% of advisers see responsible investing as a meaningful way to evaluate investments. They also found that 84% of Australian advisers cite at least some level of fiduciary concern related to selecting responsible investments, compared to 61% of advisers globally. Remarkably, 88% of surveyed advisers expect to increase allocation to responsible investing strategies over the next two years.

Lonsec recently conducted a telephone survey of several advice practices, and the consensus view was that between 20% and 30% of clients actively communicate preference regarding responsible investing. For example, they may have a view on the environment and climate change, or views on industries such as gambling and alcohol.

Looking further afield we believe that responsible investing will become more mainstream with ESG and sustainable investment principles becoming an expectation rather than a nice-to-have. There is precedent for this within the institutional investment market. In Europe, fund managers will generally not be awarded investment mandates if they have not integrated ESG and increasingly sustainable elements within their investment processes.

We have already witnessed this in the wholesale space whereby fund managers who do not actively market themselves as ‘responsible’ managers will nevertheless exclude certain harmful industries such as tobacco. It’s clear that the trend towards responsible investing is heading in a positive direction, with all participants actively engaging in the sector. In the future, responsible investment will not be merely another option for investors to select from, but rather a core part of our investment toolkit.

 

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2021 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Register for our FREE newsletter to receive investment insights, education, and SMSF trustee updates