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ESG ETFs struggle to make a positive impact

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ESG ETFs struggle to make a positive impact 1

By Fred Kooij, Chief Investment Officer at Tribe Impact Capital

In their current form, ETFs and passive vehicles are not the right tool to place money into the market if you’re seeking to achieve both financial and positive impact return.

The growth of these low-cost vehicles is understandable in the context of poor performance from some active managers this year, so it can be understandably difficult for retail investors to select good active fund managers, and justify the higher fees that they charge.

A recent Spiva report stated 45 percent of actively managed UK equity funds underperformed the S&P UK BMI benchmark year to date, a figure which increases to more than two-thirds if the period in question increases to 10 years.1

Investors seeking effective ESG and impact portfolios need to consider the significant limitations of relying on passive options for a number of reasons:

Blind index tracking

As it currently stands, passive strategies typically replicate an index without explicit engagement or stewardship on the companies within the index. This can leave passive strategies exposed to holdings at risk of poor ESG outcomes with limited opportunities to engage directly with all companies in the portfolio.

Relying on third party data

Many ETFs currently being marketed as impact or responsible or sustainable are relying solely on third party ESG data with little guided or expert interpretation. This results in these passive funds holding businesses whose practices and products are not sustainable and positively impactful.

Lack of shareholder engagement

Couple this with limited shareholder engagement and passive funds become as much a part of the problem as their holdings are. Investing for impact can’t be silent on what a company does. [We wrote about this recently]

In an actively managed approach, engagement and stewardship is more easily achieved on more concentrated portfolios; baked into bottom-up stock selection, and in the case of sustainable/impact active managers, the inclusion of explicit ESG/impact targets and outcomes.

Ignoring company disclosures

There’s enough disclosure out there for more passives to be doing a better job on sustainability. It appears, passive managers are either choosing to ignore the data in the marketplace or they’re not weighting it enough in their rules and the algorithms. With more data coming online and more disclosure by companies and other third parties, passive managers need to understand how to work with the data and incorporate it into their decision making.

Outperformance of active impact management

Furthermore, sustainable/impact active asset managers have distinguished themselves this year in a market where non-sustainable active investors have had difficulty justifying their, typically, higher management fees compared to their passive alternatives.

For example, Tribe Impact Capital’s medium risk portfolio is up almost 10% this year, to end of Q3, an 11.7% outperformance relative to ARC2

***

There are, however, some early signs of a response in the marketplace with some ETF providers beginning to acknowledge these limitations.

Some passive specialists are building proprietary indices, populated with companies that have been subject to rigourous analysis and engagement, which in turn are being wrapped into an ETF, therefore offering investors a more cost-effective product.

But there are still certain compromises for these lower fees; most underlying indices are still only updated half yearly, and the degree of shareholder engagement through voting records, as an example, still needs significant development.

So, in a complex world, where the reality of business is non-linear, can passives truly reflect this data in a rules-based environment? Inputs into decision making today need to be multi-dimensional and based on finance, social, environmental, geopolitical, and economic factors. Nuances in the data need to be appreciated as much as the data itself needs to be interrogated.

Most fund managers aren’t equipped for this type of complexity, regardless of whether they’re passive or active managers. That’s why we believe in our double CIO model (a chief investment officer and chief impact officer); investment and impact working closely together to identify and invest in tomorrow’s businesses, today.

We believe active management is still the best approach to risk adjusted good investing in the sustainable and impact investing space. Investors should not only get a higher level of risk management and investment opportunity identification, they also know that the companies they are exposed to are future fit.

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Dollar edges lower as investors favor higher-risk currencies

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Dollar edges lower as investors favor higher-risk currencies 2

By Stephen Culp

NEW YORK (Reuters) – The dollar lost ground on Friday as market participants favored currencies associated with risk-on sentiment over the safe-haven greenback.

Risk appetite was stoked by better-than-expected economic data and expectations that U.S. President Joe Biden’s proposed $1.9 trillion coronavirus relief package will come to fruition.

“The dollar’s down against other currencies but not by a whole lot,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. “I expect the dollar to be where it is now at the end of the year, and the main reason for that is while I see some signs of improvement in the economy, monetary policy is going to stay where it is.”

“I don’t think the dollar is underpriced or overpriced,” Pursche added.

For the week, the dollar slid about 0.2% against a basket of world currencies, the euro was essentially flat, and the yen lost more than 0.5%. But the British pound advanced more than 1.1% against the dollar, its best week since mid-December.

Bitcoin continues soar to record highs. The world’s largest cryptocurrency was last up 6.6% at $54,961.67, hitting $1 trillion in market capitalization.

Its smaller rival, ethereum, was last up 0.7% at $1,953.28.

The digital currencies have gained about 89% and 1,420%, respectively, year to date, leading some analysts to warn of a speculative bubble.

“One concern I’ve always had (about cryptocurrencies) is how susceptible they are to manipulation,” Pursche said. “But they’re going to continue to gain legitimacy.”

“While it’s great that Tesla made an investment in bitcoin, I’m more intrigued by Blackrock and other major investment firms taking a hard look at cryptocurrencies as a viable investment.”

The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.21% at $0.7863, touching its highest since March 2018.

The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.

Sterling, which often benefits from increased risk appetite, rose to an almost three-year high amid Britain’s aggressive vaccination program. It had last gained 0.27% to $1.40.

The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.21% to $1.2116.

The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.

(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Jonathan Oatis)

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Shares rise as cyclical stocks provide support; yields climb

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Shares rise as cyclical stocks provide support; yields climb 3

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – A gauge of global equity markets snapped a 3-day losing streak to edge higher on Friday, as the recent selling pressure on high-flying big technology-related stocks eased even as investors showed a preference for economically sensitive cyclical sectors.

Oil prices fell from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather, while the U.S. Treasury yields extended their recent rise.

The MSCI’s global stock index was up 0.47% at 681.88, after losing ground for three consecutive sessions.

On Wall Street, stocks steadied as cyclical sectors edged higher while tech names made modest advances after concerns about elevated valuations led to some selling in recent sessions.

“What we saw (this week) represents a market that is tired and may not do very much. So we are headed for some sort of a pullback, but I don’t think we’re there just yet,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“Investors are not really pulling out of the market, but they are becoming more cautious. It already has factored in another good positive earnings season.”

The Dow Jones Industrial Average rose 119.97 points, or 0.38%, to 31,613.31, the S&P 500 gained 12.93 points, or 0.33%, to 3,926.9 and the Nasdaq Composite added 92.58 points, or 0.67%, to 13,957.93.

The S&P 500 technology and communication services sectors, housing high-value growth stocks, were among the smallest gainers in early trading, while financials, industrials, energy and materials rose more than 1%.

European shares edged higher on Friday as an upbeat earnings report from Hermes boosted confidence in a broader economic recovery. The pan-European STOXX 600 index was 0.64% higher.

U.S. Treasury yields on the longer end of the curve rose to new one-year highs on Friday as improved risk appetite boosted Wall Street, while the yield on 30-year inflation-protected securities (TIPS) turned positive for the first time since June.

Core bond yields have pushed higher globally, led by the so-called reflation trade, where investors wager on a pick-up in growth and inflation. Growing momentum for coronavirus vaccine programs and hopes of massive fiscal spending under U.S. President Joe Biden have spurred reflation trades.

The benchmark 10-year yield was last up 5.1 basis points at 1.338%, its highest level since Feb. 26, 2020.

Oil prices retreated from recent highs for a second day on Friday as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.

Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, analysts estimated.

Brent crude futures were down 28 cents, or 0.44%, at $63.65 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 66 cents, or 1.09%, to $59.86.

Copper jumped to its highest in more than nine years on Friday and towards a third straight weekly gain as tight supplies and bullish sentiment towards base metals continued after the Chinese New Year.

Spot gold XAU= was down 0.58% at $1,785.71 an ounce.

The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite sapped demand for the safe-haven currency and drew buyers to riskier, higher-yielding currencies. The dollar index was off 0.295%.

Bitcoin hit yet another record high on Friday, hitting a market capitalization of $1 trillion, blithely shrugging off analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.

(Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)

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Oil falls after surging past $65 on Texas freeze

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Oil falls after surging past $65 on Texas freeze 4

By Stephanie Kelly

NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.

Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.

U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.

Brent had gained for four straight sessions before Thursday, while WTI had risen for three.

“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”

Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.

The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.

“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.

Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.

Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.

“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”

Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.

OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.

(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)

 

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