The Rise of the ESG Fund.

In recent years, the popularity of, and demand for, ESG funds has increased due to a combination of ethical concerns and the additional risk mitigating benefits attached to taking ESG factors into consideration.

In fact, many have said that failing to consider the risk posed by poor environmental, social, and governance practices could lead to losses, both for clients and for financial advisors. Multi-asset portfolios with integrated ESG stocks are an easy way to make sure client portfolios are as diverse as possible with manageable investment risk and reduced portfolio volatility.

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Not only are ESG factors an excellent way to assess risk, ESG funds have been shown to perform just as well as conventional ETFs for the same risk. Last month, ESG funds had risen to $3.4bn – nearly 45% over the previous 18 months, with assets in ESG funds linked to MSCI indexes growing by 50% over 2015. The trend shows no sign of slowing down, with the majority of institutional investors taking ESG risk factors into account when making investment decisions.

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Last month, Morgan Stanley announced that they would be introducing two new ESG multi-asset funds, mirroring the strategy of their current Global Balanced Risk Control fund, which they believe is the best way to participate in rising markets while still providing strong downside protection. These new funds – the Global Balanced Fund and the Global Balanced Defensive Fund – are the first at Morgan Stanley to incorporate ESG factors into the process and promise to both improve returns and enhance risk management at the same time, an important consideration particularly amidst the post-Brexit uncertainty which still reigns.

money-1017463_1920In response to this growing popularity, MSCI has introduced a new suite of fund metrics, scores and rankings on FactSet to help institutional investors and wealth managers better judge the ESG characteristics of their portfolios. FactSet, which provides integrated financial information and analytical applications, will now offer a new level of transparency on the ESG quality of over 23,000 mutual and exchange-traded funds. These will be ranked or screened based on their sustainable impact, their values alignment and any other ESG risk, such as their carbon footprint, making it even easier for managers and financial advisors to respond to a client’s interest in sustainability.

To learn more about ESG funds and how Henry James International Management could help you, please get in touch via email at info@hj-intl.com or by telephone on (646) 722-2739

What IS an ESG fund?

ESG stands for Environmental, Social and Governance and, when discussing investment, is primarily used to describe companies for whom these factors are a priority. ESG funds are investment portfolios which comprise companies who conduct business with sustainability and ESG factors in mind. Although initially a fairly rare entity in the investment world, there is increasing evidence to suggest that integrating ESG factors into investment analysis and the construction of portfolios can actually help boost long-term performance.

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ESGs first came onto the investment scene in the 1950s and 60s and were largely the creation of various Trade Unions. Two of the first were the International Brotherhood of Electrical Workers and the United Mine Workers who invested their considerable capital in affordable housing and health facilities respectively. The power of thoughtfully-invested capital for social change was not truly felt, however, until 1971, when a board member of General Motors drew up a Code of Conduct for practising business with apartheid-era South Africa. So many companies failed to comply with this code of conduct, that it resulted in a mass disinvestment from South African companies, a movement which greatly contributed to the end of apartheid.

 

In spite of this, the generally-held idea until the late-80s was that social responsibility was wont to have an adverse effect on a firm’s financial performance. Nowadays, however, many believe that ESG factors can actually be used to help identify businesses with superior business models, offering portfolio managers additional insight into the quality of a company’s management, risk profile, and culture.

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ESG takes into account a range of environmental concerns – such as climate change, nuclear energy, and sustainability – social concerns – such as consumer protection, human rights, diversity, and animal welfare – and corporate governance concerns, including management structure, employee relations, and executive compensation. These three factors are inextricably linked to the concept of responsible investment, which uses various methods to control the placing of investments. These include positive selection, integration, and activism.

To learn more about ESG funds – or to find out about the ESG international equity investment products that are available through Henry James International Management – get in touch via telephone on (646) 722-2739 or email at info@hj-intl.com and tune in to next week’s blog.

The International Select Portfolio

As another Olympic Games come to a conclusion, questions have begun to arise surrounding what the future holds for Brazil. With a high inflation rate and an economy expected to contract by around 3.8%, the country finds itself in the worst recession since the 1930s. Add to this an atmosphere of political unrest, with Brazil’s new interim president Michel Temer being booed at the Opening Ceremony, and it is understandable that many are contemplating Brazil’s next few years as bleak. But it is not all bad news. The Games went remarkably smoothly, and have reintroduced a sense of national pride which had recently been forgotten. Brazil remains Latin America’s biggest economy and planned projects by Shell, Santander, and Goldman Sachs to invest further in Brazil mean there are reasons to feel positive about the future.

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In Hong Kong last week, a new mechanism was introduced to help mediate extreme volatility in the market. The new circuit breaker is there primarily to prevent huge swings and spikes in price arising from trading errors and the like. It restricts a stock from moving more than 10% per 5-minute period once a session. The introduction of this Volatility Control Mechanism brings Hong Kong’s stock market into line with its global peers.

Last quarter, our International Select Portfolio returned -0.58% (pure gross) and -1.04 (net) versus -1.19% for the benchmark. For three years the portfolio returned 9.47% (pure gross) and 7.49 (net) versus 2.52% for the MSCI-EAFE Index. Stock selection and country weightings in Hong Kong hindered portfolio performance, where country weighting in Brazil helped, though it remains to be seen whether this continues to be the case.

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The Henry James International Select Portfolio, is a high conviction SMID Capitalization, at purchase, international core portfolio. The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, under $10 billion, with superior return versus risk characteristics. This is combined with quarterly, top-down risk mitigating country allocation system rebalancing, in which the management team over weights highly ranked countries and under weights lower ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI-EAFE.

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To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

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Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

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Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently-priced international stocks with superior return-versus-risk characteristics. This is combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the management team over weights highly-ranked countries and under weights lower-ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria. The primary performance benchmark is the MSCI-EAFE.

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To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).

The Emerging Markets Portfolio

It is an interesting time for Emerging Markets. 2016 is shaping up to be a good year for them in a time when many developed markets are struggling. Earlier on this week, the MSCI’s emerging markets index did better than its developed markets index over the past year, but what exactly does this mean for investors?

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Although it appears that emerging markets may finally be recovering after a long bear market, there are a range of circumstances which mean it may be too early to celebrate. To begin with, world growth has been sluggish and the US dollar is weak, distorting any clear view of Emerging Markets’ true performance. Although long-term projections for India and China are strong, both countries registered declines in the most recent period. With the performance of the two strongest Emerging Market economies shaky, the market is being carried by Brazil – whose current political and economic situation makes any prediction highly speculative – Korea and Peru. Moreover, this recovery could be attributable to Emerging Markets reliance on the materials and information technology sectors. Both sectors are performing well, but any decline in metals or oils could severely impact recovery.

 

As it stands, the greatest returns from the Emerging Markets come from the places carrying the greatest risk, making the short-term extremely volatile.

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This risk is one which we take strongly into account when compiling the Henry James Emerging Markets Portfolio. Our investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently priced international stocks, with superior return versus risk characteristics. This is then combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the agreement team over weights highly-ranked countries and under weights those which are lower-ranked. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria and we let our winners run. The primary performance benchmark is the MSCI Emerging Markets Index.

Market Commentary – Quarter 2, 2016 – Part 2

Last week’s Market Commentary examined how the global markets performed over the last quarter and this week we will be focussing on the individual performances of each of our portfolios following Brexit.

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Emerging Markets

For 2016, we are expecting broad-based growth in the emerging markets with the exception of Brazil whose recession is largely self-inflicted. We expect GDP good economic growth in Asia: India 7.4%, China 6.5%, Malaysia 4.4%, Korea 2.8%, Thailand 3.2%, and Taiwan 1%.  In Latin American GDP growth is expected to recover modestly in 2016 with Mexico 2.4%, Colombia 2.5%, Peru 4%, and Chile 1.5% leading the group. Brazil, which is in a recession, had a better than expected -6% contractions in the first quarter beating expectations with -5.4% GDP growth. The good news was that Brazil had stronger than expected GDP growth, which was the result of lower imports and higher exports.  Economists expect the Brazilian economy to hit bottom in the third quarter followed by the start of a recovery in the fourth quarter.  Globally with the help of the emerging markets we are expecting global growth to approach 3.2% and a continuation of a Goldilocks economy.

Over quarter two of 2016, the Emerging Markets Portfolio returned 3.27% (pure gross) and 2.81% (net) versus 0.80% for the benchmark. For one year the portfolio returned -4.64% (pure gross) and -6.29 (net) versus -11.71% for the MSCI- Emerging Markets Index. Stock selection and/or country weightings in Russia, Indonesia, South Korea, Taiwan and Brazil aided the portfolio’s performance. However, stock selection and/or country weightings in Mexico, Philippines, Chile, Thailand and China hindered performance. In relation to sectors, positions in finance, energy, consumer durables, communications and technology services aided performance. Sector positions in non-energy minerals, consumer services, electronic technology, retail trade and utilities hurt the portfolio’s return.

The Emerging Market economies are back in growth mode, their currencies are recovering and GDP growth is accelerating

 

International Equity Portfolio

For the second quarter of 2016, the International Equity Portfolio returned 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Stock selection and/or country weightings in Spain, Germany, Indonesia, the United Kingdom, and Japan aided the portfolio’s performance. However, stock selection and/or country weightings in India, Australia, Hong Kong, Canada and Sweden hindered performance. In relation to sectors, positions in finance, communications, consumer durable, health technology, and retail trade aided performance. Sector positions in transportation, electronic technology, utilities, consumer non-durables and technology services hurt the portfolio’s return.

International Select Portfolio

The International Select Portfolio returned -0.58% (pure gross) and -1,04 (net) versus -1.19% for the benchmark for the second quarter of 2016. For one year the portfolio returned -8.19% (pure gross) and -9.87 (net) versus -9.72% for the MSCI-EAFE Index. Stock selection and/or country weightings in Germany, Ireland, Belgium, Spain and Brazil aided the portfolio’s performance. However, stock selection and/or country weightings in the Netherlands, Hong Kong, Switzerland, France and Canada hindered performance. In relation to sectors, positions in finance, industrial services, health technology, distribution services and consumer durables aided performance. Sector positions in energy minerals, non-energy minerals, consumer services, utilities, and consumer non-durables hurt the portfolio’s return.

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Want to learn more about each of our portfolios? Check in next week where we will be taking you through Henry James International Management’s Emerging Markets Portfolio or head to our website.

Market Commentary – Quarter 2, 2016 – Part 1

This quarter, the global economy underwent a serious shake-up, with the UK’s EU referendum having initially severe ramifications for markets all across the world. In this week’s Market Commentary, we examine the financial situations of our portfolio countries now that the dust has settled.

Market Commentary

On Friday June 24, 2016 the “Wall of Worry” triumphed as British Voted to “Leave” the European Union. The VIX went up while the GBP and markets tumbled.  Then, as central banks do in a time of crisis, the market was flooded with liquidity.  After the markets stabilized, people began to look at the brighter side. As it stands, the United Kingdom is the fifth largest economy in Europe, and it does not appear that they are slipping into recession. They are headed for a little slow down, probably, recession – not likely.

Meanwhile, elsewhere in the world, Europe is experiencing stronger than expected GDP growth as it undergoes a cyclical recovery.  Emerging Market economies are back in growth mode, their currencies are recovering and GDP growth is accelerating. Things are looking up.

In the USA we expect GDP growth to continue on pace in 2016 with the two prior years’ growth rate of 2.4%.  This marks the first 10-year period that, for any single year, the USA GDP growth rate did not exceed 3%.  Globally, with the help of the emerging markets we are expecting, growth to approach 3.2% with a continuation of the Goldilocks economy we mentioned in last quarter’s Market Commentary.

In this, we predicted a close vote on the British exit, that no matter the outcome it would not really affect the markets in the long run, and that we had reached a market bottom earlier this year. Looking forward, the event will cause global volatility over the summer, and then over the next few years our estimate is that eventually both the United Kingdom and Europe will do what is best for their own long-term self-interests, which are generally tied to one’s own long-term economic interests.

In part two next week we will be discussing what this quarter meant for our Emerging Markets, International Select, and International Equity portfolios.

Brexit – UK in Limbo, Part 2

Just over three weeks since the Brexit results and the UK remains in a political limbo. Financially-speaking, however, things are beginning to calm down. After the initial shock, the markets have quietened, with the FTSE100 even moving ahead of where it was before the referendum. It looks like Europe has survived the immediate, violent reaction and the focus now shifts to what continued uncertainty, and a withdrawal from the EU, will mean for the UK, and the rest of the world.

Biggest question next – EU budget

The next big economic issue surrounding Brexit is the question of the EU budget. The EU’s current budget stands at €960bn for the years 2016-2020. £47.5bn should come from the UK up until 2020, but since spending that money on UK institutions such as the NHS played a central role in the Leave campaign’s argument, it is unlikely that the next Prime Minister will agree to honour that commitment for another 3 years.

The UK certainly will not stop paying until the withdrawal agreements have all been discussed and decided, but sooner or later the UK will stop contributing, and then the question will be what can be done to fill that gap. One possibility is that the EU will expand its revenue sources, past the current sugar tax and customs duties, the other is that net contributors will agree to pay more and net receivers will agree to accept less. Either way, this decision will undoubtedly have an effect on the economies of the remaining member states.

Brexit – What Now, Part 1

Just over two weeks since the Brexit results and the UK remains in a political limbo. Financially-speaking, however, things are beginning to calm down. After the initial shock, the markets have quietened, with the FTSE100 even moving ahead of where it was before the referendum in GPBs. It looks like Europe has survived the immediate, violent reaction and the focus now shifts to what continued uncertainty, and a withdrawal from the EU, will mean for the UK, and the rest of the world.

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The main industries affected

One of the most recent industries to take a hit was the property industry. House prices have fallen and property funds have suffered. Standard Life have suspended redemptions in its UK Retail property fund and has £2.9bn of assets under management. With London no longer seeming an attractive investment destination, Real Estate Investment Trusts have been hit too, with some dropping by as much as 20%.

Other industries hit include the Automotive, Airline, and Pharmaceutical. Of the 1.6 million cars manufactured in the UK, 77% are exported abroad, and over half of these to EU countries. UK-based airlines now have to rethink European routes and must recalculate fares, taking the new cost of visas into account. This is particularly hard for low-cost airlines like EasyJet, whose share price dropped 20%. It is not uncommon for UK pharmaceutical companies to carry out research and business overseas which will no doubt cause logistical issues but, more importantly, leaving the EU means the European Medicines Agency is no longer responsible for authorising UK pharmaceuticals which could mean slower approval for UK-manufactured drugs.

Brexit – The Aftermath

Thursday, June 23, 2016, at the market close everyone felt safe.  The Brexit vote had been completed and everyone was looking forward to the weekend after one more piece of the wall of worry was removed.  As we all know, people generally vote for what is in their own self-interest.  For a citizen of the United Kingdom it was obvious with 40 years of peaceful growth, a rise in the standard of living, and the ability for freedom of movement amongst countries for work and living (it is better to retire in the sun of Spain than experience a cold, rainy summer in the UK).

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Contentment from people that either never experienced or had forgotten the hardships in the United Kingdom in the 1950’s, 60’s, and 70’s resulted in a group of people voting against their self-interest.

What was to be a great summer weekend instead became a volatile financial mess.  The pound fell over 10%, European markets by over 10%, and a general gloom fell over the globe.

Then people realized that it is not binding; Parliament has to approve the vote.  While European leaders showed their anger at Great Britain, cooler heads surfaced.  The Spanish who went to the polls over the weekend went with the status quo.  They have seen the consequences of a severe recession; their unemployment rate, while at a 4-year low, is still over 20%.

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Analysts sat back and asked, “If there is a recession in Great Britain how will it affect China, Japan, India, the United States, and Latin America?”  And the answer is: very little. 

How many fewer cups of coffee will Starbucks sell in the United Kingdom over the next year?  Maybe 5% or less.  And if it is 5% less, what impact would that have on Starbucks total sales?  It is not very much, probably less than five-tenths of one percent.  Growth in China, India, and Brazil could make up for that very quickly.  In fact, emerging markets were down less than half of what the European markets were down.  MSCI Europe two-day return for June 24 and June 27 was –13.41% and MSCI Emerging Market two-day return for June 24 and June 27 was –4.75%.

The event will cause global volatility over the summer, and then over the next few years our estimate is that eventually both the United Kingdom and Europe will do what is best for their own long-term self-interests, which are generally tied to one’s own long-term economic interests.