The year of ESG and the ETF: 2020 investment trends

2020 will be the year investors embrace sustainable investing, pour more money into global ETFs and seek higher returns in emerging market debt.

They're just some of the trends to emerge in Capgemini's wealth management outlook for the new year.

More investors are focusing on the societal impacts of their assets, giving greater momentum to sustainable investing, according to the Capgemini Top Trends in Wealth Management: 2020 report.

“Traditionally, wealth managers kept environmental, social and governance (ESG) portfolios separate from core offerings. However, with growing client demand, advisers are now integrating ESG into their primary portfolios,” the report says.

Apart from ESG, other types of funds will also likely see increased flows this year. Ty Thurgood, director of institutional business development at Eaton Vance, says the asset manager is experiencing greater investor interest across several investment types, including income products, as investors seek to build post-retirement solutions in 2020. 

“This is in equities and bonds.  For example, we’re seeing demand for emerging market debt, as funds seek higher yields than traditional bonds may offer,” says Thurgood.

Thurgood also expects greater demand in 2020 for downside protection investment products as equity markets continue to rally. He also expects greater demand for custom investment products from high net worth investors “who are keen to move from traditional investment vehicles (unit trusts, SMAs and ETFs) into custom tax-managed individually managed accounts (IMAs).”

Crestone Wealth Management’s chief investment officer Scott Haslem says clients are increasingly focused on balancing the desire to protect capital against the scarcity of signals that an equity market correction is imminent, particularly given the recent de-escalation in geopolitical risks. 

“While assets are in many cases fully valued, the risk-friendly backdrop could see markets continue to deliver moderate returns for some time ahead. This argues for remaining invested and engaged with markets, but taking risk only cautiously and tactically,” says Haslem.

“Given the elongated nature of the current investment cycle, with traditional asset classes like equities and bonds tending to look expensive, high net worth and family office investors are also increasingly allocating to alternative assets, such as private equity, hedge funds and real property … with low correlation to traditional assets, to provide better risk-adjusted returns and additional portfolio diversification as the cycle matures,” he says. 

Haslem also notes high net worth clients are looking offshore to emerging markets for higher returns than those being offered by domestic shares and other developed markets characterised by low growth and low inflation. This includes China and other Asian countries where more diverse sectors in technology, life sciences and automation “are less expensive and more readily available than is the case domestically.”

Passive flows to ETFs

Kris Walesby, head of ETF Securities Australia, says 2020 will also witness the continued rise of exchange-traded fund. The value of the Australian ETF market is currently around $61.5 billion, up about 50 per cent from a year earlier. 

“More ETFs are appearing in the market to offer access to specific themes or growth areas like robotics or emerging markets, or to reflect views or concerns on ethical and social matters, such as the environment.”

Walesby expects continued growth in bespoke and smart beta strategies offering alternative weighting to market capitalisation indexes or the ability to exclude certain factors to minimise risks. 

“Internationally focused ETFs will appeal to those wanting exposures outside of Australia and the weak Australian dollar, such as to regions like Europe, sectors less available in Australia like technology or currencies like the US dollar which continues to be stronger than its counterparts.” 

Adrian Ezquerro, head of investments at Clime Investment Management, notes that as the “active vs passive” debate rages on, for those seeking to outperform in Australian equities, he expects a trend towards “all cap” equity investing. 

“Given tepid domestic earnings trends, influenced heavily by a rather staid cohort of large cap companies that dominate the ASX, we believe that an active ‘all cap’ approach to Australian equity investing is warranted. This allows investors to look right across the market cap spectrum to find attractive investment opportunities,” says Ezquerro. 

Given very high valuations for growth stocks and bonds, Debbie Alliston, AMP Capital’s chief investment officer of the Multi-Asset Group, says institutional investors will likely start rotating into more cyclical sectors of the market based on improving global economic growth. 

“This will see higher weights to emerging market equities and in developed markets rotation away from the technology heavy US market to Europe and Japan.  This will also help support value stocks that have been significant underperformers,” she says.

Infrastructure to appeal despite carbon challenges

Charles Hamieh, portfolio manager, RARE Infrastructure, says income-hunting investors will continue to look for haven assets like infrastructure, particularly given stubbornly low rates. He adds that infrastructure assets will feature in headlines for all the right - and wrong - reasons, representing opportunities and challenges, says Hamieh.

“2020 will stand out in terms of investors’ global acceptance of ESG principles in investing. We believe the market has been too focused on the environmental component and not focused enough on social issues. This imbalance is creating opportunities, particularly in the infrastructure sector, where companies operating ‘dirty’ infrastructure are out of favour.

“Global initiatives to reduce carbon emissions are resulting in local actions to support the further development of renewable energy and the drive toward greater electrification.

“Significant capital is being spent to mitigate the effects of climate change and adapt networks and infrastructure to cope with more volatile climatic events, increase the efficiency of infrastructure, for example, through the development of electricity storage and reduce wastage such as from leaking