After a stellar year for Liontrust, where assets under management and advice nearly doubled to £33.6bn and high inflows, the firm’s chief executive, John Ions, credited (in part) the tailwind behind ESG and his sustainability team’s 20-year track record.
In the company’s annual results, covering the year to 31 March 2021, Ions also announced plans for the launch of an ESG trust – earmarked for 5 July 2021.
The last thing he, or arguably the market, expected was a lack of interest in this ESG offering. Yet he ended up announcing just a few days before the planned listing, that the firm was not proceeding with the initial public offering (IPO), since overall demand was not sufficient to meet the minimum of £100m set out in the prospectus.
So, what went wrong? Was it misplaced hubris on the part of Liontrust, ESG fatigue from UK investors, or something else altogether?
The appetite for ESG
Research on the current market in terms of ESG fund launches shows they have pushed through another milestone and risen to new records. Sustainable funds attracted all-time high inflows of €120bn (£103bn) in the first quarter of this year, with 111 new funds launched over that same period.
This suggests Liontrust was launching its fund in an already extremely diluted market. This could have resulted in the company considering product differentiation to try and combat the overabundance of ESG funds.
The fact it launched as a closed-ended fund is relevant. With competing schools of thought on how risky ESG funds are, plus the fact closed-ended funds require lump sum investments at the point of launch, potential investors may have seen this as one risk too many to take.
A total of £6.3bn was raised by closed-ended funds in the first half of 2021, which according to the Association of Investment Companies, is the highest amount ever recorded.
Although this data could inspire confidence in and validation of the investment trust structure, delving deeper into the inflows shows that of the £6.3bn amassed over the period, £5.1bn was raised by existing close-ended funds. These were also in different sectors to Liontrust’s attempted launch.
Sector inflows for investment trusts – H1 2021
Renewable Energy Infrastructure - £883m
Growth Capital – £803m
Infrastructure – £475m
Source: AIC, as at 30 Jun 2021
What the data tells us is that thematic-focused assets such as renewable energy infrastructure are not faltering, and investors’ mindsets are not necessarily shifting away from ESG-related strategies.
Additionally, it shows investor focus on key themes such as renewables and growth capital, which are boosted by regulatory pressure and public awareness to conform to the 2.0-1.5 degree scenario under the Paris Agreement.
So ESG-focused assets are not dwindling overall, but the allocation of capital is being driven by issues that are forefront in investors’ and companies’ minds – the most important being climate action.
The Liontrust ESG Trust was aligned most prominently to sustainable development goals three and eight – good health and wellbeing; and decent work and economic growth. This is not to say the launch was destined to fail, but the IPO was facing an uphill battle as the investment trust was going against the most prominent ESG trends of today.
Source: Liontrust, Factset
Additional factors at play
- Although a sustainable finance disclosure regulation (SFDR) classification was not clearly stated in any of the documents, given the lack of a clear sustainable objective (“The Company’s investment objective is to deliver to Shareholders a total return over the long term (five years or more) by investing globally in sustainable companies”) and defined CO2 emission targets, this fund would mostly likely be classified as an Article 8 fund under the SFDR regulation.
- There are additional implications with it being an Article 8 fund. Not least the sheer number and diversity of Article 8 products on the market currently and the related discussion around how sustainable these funds truly are.
- Finally, the product did not bring anything particularly innovative to the market and investors already have the option of investing in Liontrust’s open-ended funds, which provide greater flexibility and could be seen as less risky.
To summarise, we do not believe investor faith in ESG-related assets, or indeed Liontrust’s ability to run money, has gone into reverse.
The steady build in assets for both ESG strategies and Liontrust over the past five years show both have gone way beyond ‘fad’ status. But every business takes missteps from time to time. The key here will be paying attention to how the lion roars back, and we are pretty sure they will have a couple of ideas tucked into their mane.
Neill Blanks is research director at MainStreet Partners and Al Amin Miah is research analyst. The views expressed above are their own and should not be taken as investment advice.