Experts discuss the different options accessed via closed-ended funds and other structures.

An hour’s watch. 

Responsible or ESG investing is most often spoken about in the context of equity investing, but what about from a wider multi-asset perspective?

Exploring how principles of responsible investing can be applied across a whole portfolio was the topic of discussion of our latest Hot Topic virtual lunch.

Among the areas discussed, alternatives was of particular interest to host Tim Cockerill, investment director at Rowan Dartington, a long-term devote to both responsible investing and closed-ended funds.

While the investment trust world can offer a plethora of options, he nonetheless expressed concerns about the relatively modest market cap of some of these vehicles.

For David Appleton, senior investment director at Brooks Macdonald, the alternatives universe provides one of the most exciting opportunities within sustainable investing in expanding an investor’s universe outside of conventional corporate investment in equities and bonds.

“The UK stock market through the investment trust sector has really led the way over the past 10-15 years in terms of creating opportunities to invest directly in things like social infrastructure and renewable energy,” he said.

“More recently, there have been some really interesting opportunities in areas such as homeless accommodation and energy efficiency projects where there is a narrow focus but also a clear and strong outcome from these investments”.

A wider choice

Maria Municchi, multi-asset fund manager at M&G Investments, pointed to some notable innovation coming to market in recent years in terms of the types of product accessible now that were previously only available through private investments.

“Choice has increased significantly in the past few years, not only in the sense of the types of assets but also in terms of geographic exposure and diversification of those companies,” she said.

“So, for example, instead of investing in an onshore wind company that is only focused on one country you are able to invest in entities that have different technologies in the renewables space but also spread across different countries”.

Poor supply of wind power in one country might be compensated by energy produced by a solar farm in another, she explained. These investments can provide both diversification of cashflow and income.

Lesley-Ann Morgan, head of multi-asset strategy at Schroders, moved the conversation on to talk about how an ESG investor may directly access the commodities space, a traditional play for those investing in alternatives.

No synthetics

She said: “Commodities is an important decision from an asset allocation perspective for a multi-asset fund. However, we have had lots of conversations internally about whether or not we should be using derivatives to access commodities – can that be classed as good enough from an ESG perspective?

“Ultimately what you find is clients who are very hot on this topic and are very passionate about it do not feel comfortable with using derivatives to access commodities in this area.

“It’s horses for courses but it shows the importance of being really clear about what you are really trying to achieve in your portfolio for every single aspect of all of the asset classes”.