Case Study: How AJ Bell launched its first ESG product
Mark Gillan, Head of Product at AJ Bell Investments explains how different ways of thinking, innovation and partnership with specialist firms helped the organisation deal with the challenges of launching a new ESG fund
Mark Gillan, Head of Product at AJ Bell Investments POSTED ON 12/14/2020 5:57:54 PM
The increased focus on responsible investing is a secular trend in the funds industry. In the UK, assets under management in this space in grew by 89% between January 2019 and June 2020, indicative of a wider societal interest in socially conscious and sustainable investing.
Notably, the positive trend in this area continued even amongst overall market outflows in early 2020, suggesting that the drivers of responsible investment growth are less focused around market sentiment versus the broader investment universe.
"With this being our first ESG product, there were some interesting challenges"
Traditionally, responsible investing has been seen as a strong area for active fund management, with the perception being that an active manager can add significant value in the selection of investments that are most likely to align with ethical principles and bring about environmental or societal change.
Passive managers, however, are beginning to gain market share. AJ Bell recently expanded its range of multi-asset passive funds, with the launch of the Responsible Growth fund. With this being our first ESG product, there were some interesting challenges.
Before launching a product, we had to think very carefully about its name and the language we would use to describe it. This might seem absurd but a common, and probably fair, criticism is the complexity of the terminology used in this area.
"We had to think very carefully about its name and the language we would use to describe it"
Already I have used the terms responsible, socially conscious, ethical, sustainable and ESG. These and other terms are often used interchangeably, but there are subtle differences and this can be confusing for customers, so it’s important that managers describe their products in the right manner.
We decided to use ‘responsible’ in line with the Investment Association’s Fund Communications Guidance paper, which aims to bring in a common language to aid customer understanding.
AJ Bell’s existing funds are Open-Ended Investment Companies (OEICs). We have found that this structure is simple, efficient and low-cost to operate, and so the Responsible Growth fund was structured in the same way.
The fund is “multi-passive” – passively implemented, multi-asset class, using an unfettered fund of funds approach. This provides built-in diversification and a whole of market ‘portfolio in a box’ for customers.
One of the key issues with any responsible product is that its design must suit a wide variety of competing views – one person’s ethical company may not be another’s, and there is always the danger of ‘greenwashing’.
AJ Bell decided to use underlying products that track the most restrictive of market indices, using a series of exclusions for the worst offenders and those involved in controversies, and a ‘best in class’ ESG scoring system for the remaining companies.
"We have taken a more hands-on approach than is traditional for passive managers"
This ensured a balance between responsible construction and an adequate investable universe, so there is no trade-off between principles and returns for investors.
The use of indices in this fashion ensures that there is a built-in level of investment stewardship, however it is not sufficient to ‘outsource’ monitoring to index providers.
We have therefore taken a more hands-on approach than is traditional for passive managers, with an overlay of our own due diligence process on the providers of the products within our funds, such as analysing their voting records and participation in the FRC Stewardship Code.
Responsible investment products tend to be higher-cost than their vanilla counterparts, and so when constructing a fund of funds portfolio with a low-cost mandate, this was an important consideration.
We engaged with numerous providers to research the most cost-effective products, and are actively lobbying in this area to encourage managers to reduce their prices.
More funds are coming to market every month and naturally competition will help to force costs down to a similar level to that of standard products. We also placed an Ongoing Charge Figure (OCF) cap on our fund to ensure investors know exactly the maximum that they will pay.
Data & Reporting
Data is a significant challenge in many areas, but particularly so in the responsible investment space. Investors in these products demand much more sophisticated levels of communication, needing to know both the basics of their portfolio performance, and how they are contributing to wider societal goals.
As a manager this data is also important to us, to allow in-depth monitoring of portfolio constituents and ensure their compliance with the fund’s objectives.
Obtaining and working with this data directly can be a complicated and costly exercise, so with this in mind we have partnered with various providers to obtain datasets that can be used to produce a number of metrics for investors, such as the carbon footprint of the fund.
"Different ways of thinking, innovation and partnership with specialist firms will ensure the best outcomes for customers .
This has allowed us to calculate, for example, how switching a £10,000 investment from a standard portfolio to a responsible fund would be equivalent to planting a certain number of trees, or recycling a number of rubbish bags rather than sending them to landfill.
These statistics really help bring the portfolio to life in our reporting, and help customers to understand the impact of their investments.
With the trend for responsible investment picking up pace in recent times, there will be many other providers thinking about bringing products to market.
This brings with it a number of challenges, but different ways of thinking, innovation and partnership with specialist firms will ensure the best outcomes for customers so that they can invest in a way that cares for people and the planet, but still make a profit.
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