Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Long-term performance potential intact for Responsible Investments
A weak June quarter 2022, driven by a higher-than-expected US May inflation reading, managed to spook investors and cause a sell-off in markets, making it one of the worst quarters seen in decades. Concerned investors now fear further aggressive Federal Reserve interest rate hikes could be on the cards, followed by a potential US recession. As a result, the S&P 500 and the Dow Jones fell 16.1% and 10.8%, respectively, while the S&P/ASX 200 fell 12.42%. These falls have put the US and Australian markets into bear territory.
While “green” investments have become the latest mega-trend fuelled by punters wanting to save the planet, the vast majority of green funds have been underperforming. According to Evergreen Consultants’ Evergreen Responsible Investment Grading (ERIG) Index, June-quarter data has shown for the second consecutive quarter this year, many Australian equity funds with high responsible investment credentials have underperformed their benchmarks. The ERIG Index scores are based on seven RI capabilities: ESG integration; negative screening; norms-based screening; active ownership; positive screening; sustainability-themed investments; and impact investing.
Evergreen Consultants director Michael Ohlsson points to earnings results being driven by a rotation out of tech stocks and into energy stocks as the main reason for this underperformance. “Fund managers with a responsible investment or ESG tilt tend to favour tech stocks and avoid materials and energy stocks,” Ohlsson says.
And it makes sense. Investors expect returns to be at least equal to the respective benchmark index. But at times, investing responsibly comes at a cost. And many green investors saw their portfolio valuations decline significantly during the last quarter.
According to Evergreen Consultants’ data, funds in the top quartile and second quartile of Australian equity managers in the ERIG Index under-performed in the March quarter. During the June quarter, top quartile Australian equity managers only just managed to beat the S&P/ASX 200 Index, with a decline of 11.8%, compared with an 11.9% fall in the Index.
As the rotation out of tech and into energy gathered pace, it forced more investors to rebalance their portfolios. However, oil prices have fallen back to around US$96 a barrel, from the US$120 a barrel levels reached just after Russia invaded Ukraine. Ohlsson points to the fact that leaving aside the big swing back to energy this year, funds with high responsible-investment scores have performed in line with the Index over the past three years. “Despite short-term performance issues, we are starting to see evidence that over the long term, RI investing does not cost you performance,” he said.
Ohlsson said an important issue underlying recent performance is that RI investing in Australia is still relatively new, and there is a lack of depth in the stocks available to RI managers. He concludes by saying, “We do expect some volatility in terms of performance, compared with the Index. In the short term there will be some growing pains for the sector.”
