Maximising opportunities in sustainable multi asset investing

5 min read 9 Feb 22

Summary: In the past few years, both individuals and institutions have been increasingly considering the social and environmental impact of their investments, alongside the financial prospects. This has taken place against a backdrop of uncertainty within global financial markets that has been driven in large part by the COVID-19 pandemic. 

Government involvement has gathered pace during this period, with many countries, including Belgium, France, Poland, Nigeria and Fiji issuing green bonds. Meanwhile, more and more corporates are recognising the benefits of operating in a more responsible manner and are considering how to make the transition to a more sustainable business model. The impact of the COVID-19 pandemic in terms of health challenges and the wider socio-economic impact cannot be understated, further serving to highlight global social inequality. This is why impact investing, which refers to investments designed to generate positive societal outcomes alongside financial returns, has been highlighted repeatedly during this extraordinary period as one of the key ways to move forward.

What is sustainable investing?

Sustainable investing ranges from exclusion-based strategies to positive impact investing, as shown below.

 At M&G, we define sustainable portfolios as those with one or more of the following: 

  1. The investment universe is driven by sustainability-themed considerations, which might include climate change mitigation, pollution prevention, sustainability solutions (environmental, social) and approaches that address one or more of the UN Sustainable Development Goals (SDGs); 
  2. There is a clear ambition, supported by explicit targets, to drive sustainability across the portfolio; 
  3. An investment approach that selects companies/issuers with strong ESG credentials.

M&G’s Sustainable Multi Asset fund range

In the M&G Sustainable Multi Asset fund range, part of M&G’s Planet+ range of sustainable funds, we combine sustainable investing with our longstanding multi asset approach. 

In order to suit a range of investor risk appetites, each fund is invested in different blend of equities, fixed income and cash, designed to allow the funds’ volatility to be kept below a specific ceiling.

M&G Sustainable Multi Asset Cautious Fund has the lowest volatility target limit of 9% (per annum; over a five-year rolling period). In keeping with this, its equity range extends from 0-35%.

M&G Sustainable Multi Asset Balanced Fund has a volatility target limit of 12% (per annum; over a five-year rolling period) and has a more even spread invested across the main asset classes, with an equity weighting of 20-60%.

M&G Sustainable Multi Asset Growth Fund has the highest volatility target limit of 17% (per annum; over a five-year rolling period) and therefore has the heaviest weighting to risk assets (55% to 100%).

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

Finding opportunities

M&G’s well-established multi-asset allocation process aims to identify asset classes and sectors that we believe represent attractive value, including those that may be temporarily affected by investor behaviour. We use this approach for finding both long- and short-term opportunities.

Step 1: Valuations drive our strategic asset allocation over the medium term. We use a valuation framework based on real yields of all investable asset classes to determine whether we consider an asset to be over- or undervalued.

Step 2: Tactical asset allocation. We try to take advantage of ‘episodes’ -- usually temporary phases of market weakness driven by what we consider to be irrational investor behaviour that is at odds with the fundamental economic facts. Where we identify an episode, we use the funds’ flexibility to make a (usually short-term) change to asset allocation. 

Step 3: Implementing sustainability. Once an asset allocation has been determined, we build a portfolio that considers opportunities across the spectrum of responsible investing. 

Combining asset allocation and sustainability

From a sustainability perspective, all investments in the portfolios fall into two categories: those which meet environmental, social and governance (ESG) standards (Positive ESG tilt), and those considered to be providing a positive societal and environmental impact (Positive Impact).

  • Positive ESG tilt: focuses on investments with better ESG quality 
  • Positive Impact: between 20-50% of each fund is dedicated to investments actively addressing the biggest societal and environmental challenges of our times

The portfolios as a whole are run with a climate focus, using both internal and external climate analysis tools, to ensure that we choose investments that manage their carbon emissions.

Positive ESG tilt

For the positive ESG tilt portion of each portfolio, we choose assets that reflect our allocation preferences from a closely scrutinised investment universe to make investments that demonstrate high standards of ESG behaviour. 

We select assets from a wide range of asset types. They invest in, among other things, equities, government and corporate bonds, investment grade and high yield and include those from the emerging markets, currencies, green bonds and infrastructure.

The funds use quantitative screening to ensure holdings exhibit high ESG standards, by:

  • Screening out companies that are in breach of the principles of the United Nations Global Compact for business and that derive their revenue from specific sectors: tobacco, alcohol, adult entertainment, gambling, thermal coal, defence and weapons 
  • Excluding companies that generate more than a certain percentage of their revenue from certain activities (for example, those participating in unconventional oil and gas extraction if this comprises more than 10% of revenue) Using proprietary internal, and third-party, screening of ESG-rated companies 

Positive Impact

This portion of each fund is dedicated to companies and institutions that intentionally aim to make a positive impact on some of the world’s most pressing environmental and social challenges. 

We identify potential impact investments via the M&G Positive Impact Framework, over six key areas:

  • Climate action
  • Environmental solutions
  • Circular economy
  • Better health
  • Better work & education
  • Social inclusion

These positive impact areas each reflect one or more of the 17 UN Sustainable Development Goals (SDGs)*. The SDGs capture some of the most important challenges facing the world today. They include basic ideals such as ending poverty and ensuring nobody goes hungry, as well as more complex concepts such as achieving sustainable cities and communities and ensuring responsible consumption and production. 

The impact assets come from a range of asset classes including listed equities, green and social bonds, listed infrastructure or specialty funds.

* While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.

Our current views

Preference for equities over fixed income

Our key strategic observation is that, given historically low yield levels across asset classes, equity markets remain more attractive over the long term than fixed income exposure. Having said that, we are currently holding a slightly higher cash weighting than usual across the portfolios, in order to be able to respond to any tactical opportunities that might arise. 

Inflation and rates

We believe that the current inflationary dynamic might persist into the short- and medium-term but not into the long-term. In other words, we don’t believe we are entering a new ‘high inflation’ regime. However, we do believe that the recent rise in rates could create interesting opportunities in equity markets for long term investors.

We also share the market’s view that the Fed will start tightening monetary policy this year. With more than four rate hikes already priced in, it is becoming increasingly unlikely that the Fed will be able to surprise on the upside, but this remains to be seen.

Long-term sustainability trends

We see some longer-term opportunities in sustainability trends, including renewables, circular economy and social housing. We are also finding more prospects in sustainability-linked emerging market bonds, more of which have been recently issued, and which have experienced weakness in the past few months.

By Maria Municchi

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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