7IM’s Ritchie: Taking an active approach with sustainable ETFs

Multi-asset managers always need a good tool box, and for this reason I was an early adopter of sustainable ETFs – not for investment opportunities per se, but for ‘tweaking’ asset allocation. The 7IM Sustainable Balance Fund is the ESG (environmental, social and governance) version of the 7IM multi-asset funds range and aims to mirror the asset allocation, for a balanced risk profile.

While the actively-managed core allocation is direct equities, bonds and alternatives, the powerhouse which aims to drive the performance of the fund in the long term, in the short term, that tool box needs to be kept close. Tweaks need to be made to asset allocation to take advantage of shorter term return expectations. One region’s equity market might be expected to do better than another’s, or equities might be expected to do better tactically in the next year than bonds. This poses some problems – how do you adjust the asset allocation to optimise the outcome for the fund in different short term investment environments without disturbing a long-term actively-managed core portfolio and in a cost efficient manner?

The answer, for me (at least in part) is sustainable ETFs. ETFs are a liquid and low cost way to achieve an exposure to an asset class. Once we have decided how the tactical position differs from the long-term core positioning we can use these sustainable ETFs to add to equity allocations. So, for instance, if you take the view that Europe is coming out of a period of slow and dull growth in earnings and is going to outperform other regions in the short term, then it would make sense to increase exposure to European equities but maybe not for the long term – we look at long term strategic asset allocation on a different basis looking through the shorter term cycles.

This can be achieved by buying a sustainable European equity ETF such as the UBS MSCI EMU SRI Ucits ETF which invests in companies in the MSCI sustainable and responsible index on stocks in the European Monetary Union.

One the other hand, if the view is that emerging markets equities have performed particularly well and there is a risk of them underperforming in the short term then a reduction in exposure to the equities in that region might be appropriate. We might then sell exposure through an existing long position in an ETF such as the iShares MSCI Emerging Markets SRI ETF.

As well as performing equity tilts, it is also possible to switch easily between asset classes. For instance, reducing overall exposure to bonds, perhaps selling an existing holding of the sustainable bond ETF. Or simply adding a sustainable global equity ETF such as the iShares Dow Jones Global Sustainably Screened UCITS ETF, which has the effect of raising equity risk and reducing risk from bonds.

In addition to being an efficient way to reposition an actively managed portfolio of sustainable equites and bonds, there are also a number of ETFs which replicate sustainable alternative asset classes such as timber, water and clean energy. We like the iShares Global Water Ucits ETF (and, as an aside, I have to admit a soft spot for the eye catching code, too – IH2O – a stroke of marketing genius). The 7IM Sustainable Balance fund has held positions in these sustainable alternatives as a way to gain exposure to asset classes which are relatively uncorrelated to other asset classes such as equities and bonds.

With their sustainable credentials, low charges and the ability to buy and sell in fairly large size, sustainable ETFs, whether equity, bond or alternative are a useful tool to have not just in your tool box, but also in your back pocket. What’s more, they don’t have to compromise an actively managed portfolio – merely complement it.

Camilla Ritchie is senior investment manager 7IM