 How are ESG focused indices different from traditional indicesESG indices take the same universe of companies as a traditional index but make rules-based systematic adjustments. For example, a set of ESG index rules might exclude companies with exposure to alcohol, tobacco, fossil fuels, weapons manufacturing, and adult entertainment. Furthermore, the rules might adjust the weighting of the company based on its ESG score. Why are ESG indices important?ESG indices are used by ESG-focused index tracking funds and ETFs. By comparing the performance of ESG focused indices and traditional indices we can see whether or not the ESG focus positively or negatively impacted performnace relative to traditional equity indices. Whilst pre-2022 some have argued for an ESG premium over the long-run (good companies should be well rewarded via a lower risk premium), since 2022 the hard reality of ESG relative underperformance compared to traditional equities is a reminder that any such premium is indeed "long-run", and in the meantime, short- and medium-term performance differentials matters too. What are the main differences between ESG focused indices and traditional indices?Whilst methodologies will vary from index to index, at a high level the key difference of ESG indices and funds to traditional indices and funds is:
When did ESG performance shine?The Covid era seemed like a golden era for ESG funds and they received record inflows. ESG focused world equity indices slightly outperformed their parent indices in 2020 at a time when the world stood still and the oil price briefly went negative. Investors could get similar or better returns, and have a clearer conscience. What changed in 2022?A combination of pent-up demand, monetary supply and then the Russia-Ukraine war and related sanctions and energy crisis marked the return of inflation. ESG focused funds excluded fossil fuels and materials and so did not hold "inflation protective" sectors that traditional equity indices continued to hold. We explored this further in our published inflation-related research at the time. Why were ESG funds less resilient to the inflation shock?Ironically, the exposures that do best in an energy shock and a higher inflation era, such as energy, materials, and commodities are the sectors that were excluded or low-weighted in ESG focused indices/funds. Similarly following the Russia/Ukraine war and heightened geopolitical risks, the defence sector has performed very strongly: this is part of traditional indices but not part of ESG indices. What is the difference for ESG indices pre and post Covid?In summary, ESG indices fared similarly to traditional indices pre-Covid, fared slightly better than traditional indices during Covid, and have fared worse than traditional indices since Covid. We are now living in a higher inflation era, with changing energy supply chains and an era of geopolitical insecurity. Furthermore with the new US Presidential administration under Donald Trump being pro-oil and less generous to clean energy, these trends could continue. How should advisers navigate clients' ESG preferencesIncreasingly advisers want or need to take clients' ESG preferences into account. Some clients may have a ESG preference, so long as returns are not compromised. Other clients may have a ESG preference as a priority over returns. Having an informed discussion about the differences between traditional and ESG investing can help explore these preferences in a more informed context. ESG is struggling in a world of energy supply changes and increased defence spendingThe chart below shows the performance lag between a Socially Responsible world equity ETF and a traditional world equity ETF. The ESG-focused Socially Responsible ETF started materaily underperfomring from December 2021, just before the Russia-Ukraine war and related sanctions disrupted energy supply chains and forced the US and Europe to rethink their need for defence spending.   How hard is it to beat the world equity indexA world equity index is hard to beat. And, according to the SPIVA studies, very few active global equity managers do so persistently. Listed Private Market Managers have persistently outperformed world equitiesAnd yet, an index-tracking fund that tracks an index of the largest listed private market managers (firms such as Apollo Global Management, Blackstone, Brookfield, KKR and 3i) has persistently outperformed a broader world equity index since 2008. This persistent long-term outperformance is one of the reasons we like including Listed Private Market Managers as an exposure within portfolios we consult on. What is the return premium for Private Market Managers?We refresh our regular study and find that the long-term (since 2008) premium of Listed Private Market Managers performance over Public Equities increased from +3.2% at end 2023 to +3.4% at end 2024. For investment committess targeting a net return of say World Equities +2%, net of fees, exposure to a simple Private Market Managers ETF has consistently delivered persistent alpha. How did Private Market Managers perform in 2024?In 2024, Private Market Managers was one of the best performing asset classes, returning +31.7%, compared to +17.3% for World Equities, both in GBP terms. What is the right "PME" benchmark for a private equity fund?This raises the question should private equity funds aim to deliver returns above public equities (represented by a world equity index), or should they aim to deliver returns above the returns of a listed private market managers index (on a public market equivalent ("PME") calculation basis)? We think the latter: but we don't expect many to accept the challenge. What are the risks?Unsurprisingly, Listed Private Market Managers is a higher beta index, relative to a world equity index. This means when markets are up, they go up more. When markets are down, they go down more. The performance of Listed Private Market Managers experienced a major dip in 2022 as interest rates rose rapidly. This was because of the exposure of private market funds to rising borrowing costs. This made the sector even more sensitive to rising interest rates than the Property or Infrastructure sector, within the Alternative Assets basket. What about the "illiquidity premium"?We prefer not to have exposure to illiquid funds in any portfolio we consult on for our UK financial adviser community. Why? Because we think the "illiquidity premium" is elusive: hard to harvest if things go well, and evaporating quickly if things do not. What does this mean for investment committees?
How can UK advisers get exposure?This exposure is readily available via a London-listed ETF launched back in 2007. There is nothing new about this exposure, but it is certainly worth taking a fresh look. For platforms that cannot trade ETFs, advisers can consider a Alternatives fund that includes an allocation to a Listed Private Markets Manager ETF. Find out more  What is driving gold prices?There are three key drivers of the gold price in 2024-25. Some of these trends are structural, some are more short-term. 1. Geopolitical Risk and "Risk-Off" DemandFirstly, gold is an uncorrelated asset class meaning that it is an accessible and liquid diversifier. It can act as a shock absorber during period of elevated geopolitical risk. So the recent uncertainty around Trump's tariff policies and what that could do to equity markets (earnings risk) and bond markets (inflation risk), makes Gold an "risk-off" Alternative. 2. Central Bank Buying: Structural Demand from Emerging MarketsSecondly, Central Bank buying: although the Western world has reduced the amount of gold it holds in Central Banks reserves, Developing Markets - such as China, India and Russia - have been buying physical gold, such that overall, Central Bank gold reserves are on the increase. This is has been a medium-term trend for BRICs countries to reduce their dependency on the Dollar. This is a medium-term structural trend. 3. Gold as a Store of Value and Inflation Hedge: Debt ConcernsFinally, a store of value and inflation hedge: as markets worry about debt indigestion - the oversupply of US Government Bonds and the long-term sustainability of Western e.g. US/UK debt levels, Gold is a "real asset" that preserves value should there be any risk of devaluation of debt securities. Gold is a "real" store of value because it also acts as an inflation hedge: whereas nominal Bonds cannot hold their real value when inflation rises, Gold tends to hold its value in real terms and has withstood inflation shocks through revolutions, wars and even back in Biblical times! This is a long-term structural trend. Find out more
 In a recent FTAdviser article, industry experts discuss the challenges facing investment trusts and the importance of strong internal governance.
Click here to read full article 
Elston explores how advisers can buy UK gilts directly for their clients In this article and CPD webinar.
 The Bank of England, the UK's central bank, today cut rates by 25bp from 4.75% to 4.50% on weaker than expected economic growth. What is the market reaction?The market reaction is an increase in the FTSE 100 for two reasons: firstly lower borrowing costs are positive for corporate earnings, secondly Sterling has weakened on the news (reflecting the weaker economic growth outlook). Because FTSE 100 companies have predominantly USD-linked earnings, the translation effect makes the FTSE 100 look higher when Sterling weakens relative to the Dollar. What is the outlook for the UK economyWe focus on the three key macro drivers for the UK economy: Growth, Inflation and Rates. The Bank of England's central projections consistent with the MPC's forecast were changed as follows, relative to their November 2024 meeting: 2025 GDP Growth was downgraded from +1.50% to +0.75% 2025 CPI Inflation was upgraded from +2.75% to +3.50% The expected interest rate at the end of the three forecast period were increased from 3.50% to 4.00%. In summary this shows lower growth, higher inflation and higher terminal rates. (See chart) Might the Bank of England cut more?The Monetary Policy Committee (MPC) vote was 7-2 in favour of a 25bp cut. Interestingly 2 voted to cut rates even deeper by 50bp to 4.25% to support economic growth SummaryAfter being slow to respond to the inflation shock in 2022, it now looks as though the Bank of England may have overtightened relative to growth and is now exposed to "stagflation risk". Stagflation is when the economy is caught in a lower growth and higher inflation trap. This will be a challenge for policymakers to navigate.
Find out more about the Elston Smart-Beta UK Dividend Index (ticker: ELSUKI)
For latest UK Equity Income index factsheet click here 
What tariffs have been announced?Hardly having got his feet under the Oval office desk, Donald Trump has shaken markets by announcing the intended implementation of significant tariffs on imports from Mexico, China and Canada. Initially due to come into force with immediate effect, but with the US now rowing back a little on timing, imports from Mexico are set to incur a tariff of 25%, with the same levy for Canada, albeit that energy imports from Canada will be subject to a reduced rate of 10%. Chinese imports will also incur a tariff of 10%. At present it is unclear as to whether this is a calculated tactic designed to send a message, and that in the event the tariffs will be withdrawn as fast as they were announced, or whether the US intends to dig in its heels. Either way, the short-term consequences for markets are almost universally negative. What impact will the tariff announcement have?In the immediate aftermath, China, Mexico and Canada have all announced retaliatory measures of their own, including counter-tariffs on imports from the US. However, after initial phone conversations between President Trump and his counterparts in Mexico and Canada, tariffs have been delayed for a month. Both Mexico and Canada have pledged to increase border security and prevent illegal border crossings and control the influx of Fentanyl. If tariffs were to remain, a near-term knock-on effect would be a rise in prices in the US, exacerbating inflationary pressure. In terms of supply chains, the US has its closest ties with its direct neighbours to the north and south and disrupting these will have negative consequences for the labour market as well as putting pressure on prices. US exports to the three affected countries will also diminish. As significant as any of these direct economic consequences is the general uncertainty generated by the lack of clarity as to what end-game is envisioned and how long the tariffs will remain in place - something already weighing on global markets. What is the ultimate aim of the introduction of the tariffs?Trump has cited the control of both immigration from the south and the trade in fentanyl from China via Mexico as drivers for the tariff announcement, but the targeting of Canada makes less sense if these are the only aims. If, however, concern is focused more on the US trade deficit, then it would have made sense to target countries with which the US has a larger trade imbalance in order to bring greater pressure to bear. Starting with its two nearest neighbours, with whom bilateral trade and labour ties are significant, seems unnecessarily destructive. This seemingly muddled policymaking is part of the reason why markets seem hesitant to accept that Trump means to go through with the tariffs, as illustrated by the recent oscillations in the currencies of the three affected countries. How to protect from the potential consequences?Irrespective of Trump’s aims in announcing the tariffs, the most significant outcome has been an increase in uncertainty, and markets don’t like uncertainty. If the situation develops into a full-blown trade war, then the impact on global GDP - as estimated by the WTO - would be a double-digit decline. If it turns out to be more of an exercise in message-sending than a long-term policy, then by crying wolf, the US has merely served to undermine future trade relationships by casting doubt on its reliability as a partner. In all of these circumstances, being well diversified in terms of regions as well as asset classes such as alternatives which can potentially shield the portfolio from tariff related uncertainty.
Hoshang Daroga, Investment Director Elston Consulting Read in PDF |
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