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Foster Denovo launches passive ESG range

08 February 2021

Foster Denovo’s Declan McAndrew explains why the financial advisory firm has expanded its ESG portfolio offering with a new range of passive portfolios.

By Eve Maddock-Jones,

Reporter, Trustnet

Financial advisory firm Foster Denovo has launched a new risk rated, passive ESG (environmental, social and governance) range for investors to supplement its existing active Sustainable Dynamic Portfolios (SDPs).

The Passive Sustainable Dynamic Portfolios range is designed to provide clients with “an option to do more with their savings and investments than purely generate competitive financial returns”.

The new range will cater for a variety of client circumstances, such as attitude to risk, investment time frame and investment goals.

Each of the five portfolios will be constructed around a different level of risk and is part of the firm’s ongoing partnership with ESG fund research specialist Worthstone, who will carry out investment and sustainability risk assessments on the new range along with Declan McAndrew (pictured), Foster Denovo’s head of investment research.

The portfolios will be invested in physically backed ETFs that exclude companies without clear ESG practices.

Although the passive range will have the same underlying benchmark and risk strategy of the active range, McAndrew said they will not just be cheaper copies.

Instead, the range is more focused on ESG risk mitigation rather than the more “progressive” investment approach seen in the active sustainable range.

Getting this new passive range clearly outlined and differentiated was why the Foster Denovo team took longer to develop its passive offering and didn’t launch it in tandem with the active range last September, McAndrew said.

“I was very keen to make sure that we could present that in the right way to clients: that it isn't a cheaper version of the active,” he said.

Questions over the suitability of the passive approach for ESG investing have been raised and was the subject of a Trustnet article last week.

And McAndrew (pictured) said when the range was first being developed he had a “good healthy scepticism” regarding how passives could be used in sustainable investing and “some of the ‘compromises’ [that] you have to bear in mind in terms of a passive vehicle” and an index-tracking approach.

“We actually have the word ‘compromises’ within our brochure,” he said.

Indeed, McAndrew acknowledged some of the limitations of a passive approach for ESG investing adding that the aim would be for stronger benchmarks going forward.

“You’re never going to have a passive index provider being able to leverage off influence with companies, etc because that’s not what they do,” he said.

McAndrew further noted that the funds within the passive range may have some miners or oil companies due to the make-up of the index, although the bulk of the companies would be “net positive”.

“So, you are not going to exclude all of those companies that have some of those ‘controversies’,” he said.

However, the head of investment research said it had been “very clear” that if an investor wants to be progressive and to exclude some companies then they should go for an active approach without elements of passive.

Yet, it is important to have a passive ESG offering, even if they aren’t as progressive as active strategies, said McAndrew, because to not have one would be to ignore the growth in popularity of passives.

Another reason is that without a passive ESG options it would be difficult for investors to build a low-cost ESG portfolio from the range of products available.

The popularity of tracker funds has continued growing in recent years as investors have sought out cheap ways to replicate the returns on offer from markets boosted by the pro-growth conditions since the global financial crisis.

Indeed, tracker funds now represent £256bn or 17.8 per cent of total industry assets under management, according to the Investment Association (IA).

And responsible investment funds have also seen higher inflows more recently, with net retail inflows of £1.1bn in December alone and around £10bn for the year overall.

But in the current environment, with the growing popularity of passive strategies and ESG-sustainable investing there is a demand that needs to be met, he added.

“We’ve seen that there’s cost pressures on fund management, as there is on the financial advisory charge,” he said. “So, to not acknowledge the growth in passive and the valid reasons that clients and advisers choose passives [and] to not actually then try and focus on the progress in that field, I think would be kind of sticky.

“You can be purists all the way about it, but the real world tells you that you’ve got to bring people along with you.”

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