ETF portfolio modelling provider ElstonETF believes the work done on offering Queens' College Cambridge a managed offering to help it divest itself of its investments in extractive and carbon-intensive industries proves the move can be done without compromising returns.
Elston advised the university on apportioning an element of its global equity allocation into a self-managed portfolio constructed using sector-based ETFs that specifically exclude in particular oil and gas companies.
The portfolio is designed to not lose sight of the university's investment committee overall performance objectives. The portfolio is constructed using State Street ETFs as the building blocks.
"Universities are coming a lot of pressure from students to divest from carbon-intensive industries such as the oil and gas sector to secure a greener future," said Henry Cobbe, head of research at ElstonETF. "We don't have a view on this debate, but given some asset owners and some asset managers say this hard or impossible to achieve, we are just saying there are ways of doing this if clients require it without compromising diversification and potential for returns.
He added that the growing number of more nuanced index and ETF exposures "enables this flexibility to design portfolio solutions that match client needs and objectives."
The process undertaken is akin to the design of any investment strategy with Elston consulting with the Queens' College investment committee on the constraints and the time horizon for the investments. Elston then uses indices to populate the asset classes.
"If there isn't an existing index that fits the bill, we can develop that too. For custom portfolios, we use ETFs for broadly diversified index exposures, and create a systematic weighting scheme that is consistent with the objectives, constraints and client preferences."
Visibility of investment
Cobbe note that using index investing to divest any investment in oil and gas, for instance, was relatively easy. "There's a further decision around weighting scheme, but that's it," he said.
"It's much harder for institutions when they are in pooled funds whose manager does not want to exclude those securities just for a handful of investors," he noted. "It gets even harder when institutions are in pooled funds with exposures to multi-manager funds, where it's hard to get look-through data about whether there is exposure to a particular sector or not.
"Furthermore, those underlying managers may not want to be constrained. So, the danger of getting divestment wrong is not of foregone returns, but it's the danger of thinking you are divested, when in fact, owing to some look-through holding, you are not.
In this respect, he said, the transparency and diversification of an index-based approach is "helpful and straightforward."
Given the well-documented rise of ESG investment, Cobbe predicts that more institutions where ethics is high on the agenda will turn to funds - and particularly passive funds - that can help them fulfil their goals in this direction.
"I would expect ESG to become the norm, rather than the exception," he said. "This is achievable via ESG funds and at lower cost using ESG ETFs. Fossil fuels is a difficult one as they may seem unethical to one group of people, but not unethical to another. Our job is to deliver solutions that match client preferences, not to take a view."
Edward Malcolm, head of wealth for State Street ETFs, said that by using his company's Sector ETFs it provided an example of how the product was moving from being "satellite to core" of allocation, adding that the way that Elston was using the funds was innovative.