Cop26

Time to Consider a Multi-Asset Strategy?

A multi-asset approach can offer a focused exposure to the climate theme, writes Craig Mackenzie, Head of Strategic Asset Allocation at abrdn.

With China now aiming to be carbon neutral by 2060 and companies making rapid progress in alternative energy technologies, we are on the cusp of a revolution. We expect to see a massive shift in the way we live and work. Forecasts suggest 20-fold growth in revenues for electric vehicles and renewable energy by 2050. This is a fantastic long-term growth story.

There are many investment solutions that seek to capitalise on the climate opportunity. Among them, we believe a multi-asset approach is particularly compelling. Here, asset managers can offer investors a focused exposure to the climate theme, while carefully managing the risks that sometimes come with higher return potential.
Strong thematic exposure

The first challenge for investors is how to access the climate theme. It can be surprisingly hard to find investment funds with strong exposure to the technologies that will drive the low-carbon transition.

This is counterintuitive, given the dozens of sustainability funds on the market. But if you take a look at the top-10 holdings in many funds with ‘climate’ or ‘sustainable’ in the label, you will frequently find mainstream names like Microsoft or Amazon. These companies may have good operational environmental policies, but they are not strongly exposed to the climate opportunities theme. Why, then, are they in the portfolio? We suspect it is because most sustainability or climate funds have standard equity benchmarks and tight tracking-error limits that require them to hold benchmark-like exposures.

Indeed, our initial analysis suggests that standard global equity benchmarks only have a 5-10% exposure to EU Taxonomy-aligned activities. We find that many funds that are labelled ‘sustainable’ do better than this, doubling the level of exposure to 20%. However, this still leaves 80% of funds exposed to activities that are not strongly associated with the sustainability theme.
One solution is to forgo standard equity benchmarks and instead start with a list of companies whose core businesses are to provide climate solutions. This means investors can potentially align 75% of their portfolio with the EU Taxonomy, rather than a mere 20%. This, though, does mean that such a fund will perform differently to standard equity benchmarks. However, we believe that if an investor is serious about gaining strong exposure to the climate theme, then the portfolio has to look different to a benchmark that is only 5% exposed to this theme.

Managing risk

While strong thematic exposure might be an investor’s goal, there can be dangers in taking a highly concentrated exposure to sustainability themes. The S&P Clean Energy Index provides a good example. It sold-off during the pandemic shock in March 2020, then rose sharply, before falling again by 50% from its peak in January to May this year. Overall, it has offered investors decent returns – but put them through quite a roller coaster ride. By our calculations, the volatility of exchange-traded funds (ETFs) based on this index has been around double that of standard equities over the last three years. There is a similar story for other thematic ETFs.

How can we achieve a smoother investment journey? We believe diversification provides the answer. And one way is through a multi-asset approach that seeks to ensure diversification at two levels: through equities and across asset classes. Within equities, investors can have broad exposure across the full range of companies exposed to the climate theme. Investors can also diversify across asset classes. For example, by holding pure climate exposures in ‘green bonds’, renewable energy infrastructure and ‘green equities’.

To illustrate this, we created a model multi-asset climate portfolio. As the chart shows, the strategy was able retain a very high exposure to the climate solutions theme – but with less than half the volatility of the S&P Clean Energy Index.

Final thoughts…

We believe positive environmental change will come in part through the investments and the choices we make. One way is by investing in companies that are engaged in activities that seek to help the world mitigate, or adapt to, climate change. In doing so, as investors we can play our part to ensure climate change is not inevitable.

Important Information

The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested. Please consider the below risk factors:

  • The fund invests in equity and equity related securities. These are sensitive to variations in the stock markets which can be volatile and change substantially in short periods of time.
  • The fund invests in securities which are subject to the risk that the issuer may default on interest or capital payments.
  • The fund’s price can go up or down daily for a variety of reasons including changes in interest rates, inflation expectations or the perceived credit quality of individual countries or securities.
  • The fund invests in emerging market equities and / or bonds. Investing in emerging markets involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
  • The use of derivatives carries the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as a failure amongst market participants. The use of derivatives may result in the fund being leveraged (where market exposure and thus the potential for loss by the fund exceeds the amount it has invested) and in these market conditions the effect of leverage will be to magnify losses.

The fund is a Sterling dominated unit trust, an authorised open-ended investment company (OEIC). The information contained in this marketing document should not be considered as an offer, investment recommendation or solicitation, to deal in the shares of any securities or financial instruments. It is not intended for distribution or use by any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication or use would be prohibited. No information, opinions or data in this document constitute investment, legal, tax or other advice and are not to be relied upon in making an investment or other decision. Subscriptions for shares in the fund may only be made on the basis of the latest Prospectus and relevant Key Investor Information Document (KIID). 

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from marketing) any kind of investment decision and may not be relied on as such. Historical data and analysis, should not be taken as an indication or guarantee of any future performance analysis forecast or prediction. The MSCI information is provided on an ‘as is’ basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the ‘MSCI’ Parties) expressly disclaims all warranties (including without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (www.msci.com).

This communication constitutes marketing, and is available in the following countries/regions and issued by the respective abrdn group members detailed below. abrdn group comprises abrdn plc and its subsidiaries: (entities as at 27 September 2021)

United Kingdom (UK)

Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority.

Europe 1, Middle East and Africa

1 In EU/EEA for Professional Investors, in Switzerland for Qualified Investors – not authorised for distribution to retail investors in these regions

 Belgium, Cyprus, Denmark, Finland, France, Gibraltar, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, and Sweden: Produced by Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL, and Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK. Unless otherwise indicated, this content refers only to the market views, analysis and investment capabilities of the foregoing entities as at the date of publication. Issued by Aberdeen Standard Investments Ireland Limited. Registered in Republic of Ireland (Company No.621721) at 2-4 Merrion Row, Dublin D02 WP23. Regulated by the Central Bank of Ireland. Austria, Germany: Issued by Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL, and Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK. Switzerland: Aberdeen Standard Investments (Switzerland) AG. Registered in Switzerland (CHE-114.943.983) atcSchweizergasse 14, 8001 Zürich. Abu Dhabi Global Market (“ADGM”): Aberdeen Asset Middle East Limited, 6th floor, Al Khatem Tower, Abu Dhabi Global Market Square, Al Maryah Island, P.O. Box 764605, Abu Dhabi, United Arab Emirates. Regulated by the ADGM Financial Services Regulatory Authority. For Professional Clients and Market Counterparties only.

To Top
Newsletter SignupReceive all the latest stories from the ESG Investor editorial team

Subscribe to our free weekly newsletter below and never miss a story.

Share via
Copy link
Powered by Social Snap