Leading The Way

(IFA Magazine)


Many things have changed over the last ten years. Few are more prominent than the continuing rise in the awareness and popularity of investing in a way which benefits humanity and the environment in which we live. Marking the ten year anniversary of their ethical model portfolio service, Sue Whitbread talks to Wayne Bishop, CEO of King and Shaxson Asset Management, about the changing market and why he is so positive about the future prospects for responsible investing and also the model portfolio approach.

FAM: Firstly, congratulations on celebrating the first ten years of your Model Portfolio Service – how has the market changed over that time?

WB: Thank you. Our ethical model portfolios (MPS) were launched in February 2010 and can be accessed through various platforms. Since then, we’ve seen substantial changes in the market. Ten years ago there were a small number of platforms offering a Managed Portfolio Service and the concept was still considered a relatively new idea back then. Nowadays it has become common practice with a large number of platforms available. The rise of passive investing has had a big impact on what goes on in the market in general, but not necessarily on what we do.

One particular change that we’ve seen is that when we first brought out the product we would use a number of exchange traded funds (ETFs). MIFID II has made ETFs more difficult for some advisers and platforms to justify on some of the products so we have stopped using those. We’ve also seen some issues with the ethical application of stock borrowing and lending on that front. The MPS concept itself has become widely accepted and widely embraced by the IFA community. It represents an efficient and effective way of providing their clients with a properly diversified portfolio without the need for the adviser business having to get involved in the detail of the day today asset allocation and fund selection decisions.

Whilst the running of conventional model portfolios can often be feasible for an IFA business to manage in-house, when it comes to an ethical and SRI model it can be quite difficult to do. There is so much more detail to have to look at, particularly as regards the different types of holdings within the funds and the ethical acceptability of those holdings. It requires many additional research processes and we believe that this will continue to evolve. We do not know how many platforms there will be in a few years’ time of course and how much more consolidation will occur. One thing we do know is that the whole acceptability of MPS has now been widely embraced. We’re also seeing costs coming down both from a platform perspective and from a management perspective making it an even more attractive product for advisers to consider for their clients. Our length of experience in this specialist arena is a major factor in our success.

As we would expect, there has been increased competition coming into this space over the years. We generally find that these products tend to be more quantitative-based which sometimes does rather miss the real heart of the matter when it comes to ethical investing, and that is what is desirable for the client.

Interestingly, over the last five years we’ve seen ethical models generally outperforming conventional portfolio models and with lower volatility. This has a lot to do with the oil price and general commodity prices which add volatility to the market and have generally under performed. These have historically been core holdings in many conventional portfolios and indices. However, this means that a client no longer has to consider sacrificing returns in order to pursue an ethical investment mandate.


IFAM: Can you give us a brief outline of the King and Shaxson MPS proposition?

WB: If we step backwards a little here, it all started for us just over ten years ago. We were approached by a number of ethically-minded IFAs who wanted a model portfolio management solution for their smaller investment clients and one which had an ethical mandate at its core. They also wanted it to be accessible through wraps and platforms. Importantly, they were already entrusting us with their clients’ full discretionary mandates so the MPS was a logical extension and a good fit. Clearly, this new fund of funds portfolio would be designed to meet the underlying clients’ ethical values as well as risk/return objectives. This involved us investing in underlying funds which were not only appropriate for inclusion in an ethically balanced portfolio but also funds we had properly researched as meeting our specific objectives. At the time, we found that the universe of acceptable funds was fairly limited. We have seen this grow significantly over the years. Our proposition has always been to provide a robust, ethical product that would meet the requirements of our underlying investors and also which they could easily understand. It is important to us to safeguard our investors’ interests by applying a disciplined and thorough process of research into funds as well as to the investment houses which operate those funds. We continue to do this today.

Following on from this, we subsequently designed another range of Model Portfolio Services which involved a blend of direct equities and REITs as well as funds, for another group of IFAs. This has continued and is known as our Direct Equity Portfolio Service. We’re able to be slightly more adventurous on our ethical stance here. For example, when it comes to property investments,we could have REITs which focus on social housing,affordable rental housing and medical properties rather than conventional rights which are just available in the open ended market.

IFAM: How has the MPS evolved to suit differing client needs?

WB: The big change for us has been the growth in the universe of acceptable stocks. Many new ethical funds have come to market although, if I’m honest, some of these are just green wash. Even today, we still see some companies bringing out funds which contain relatively large holdings in global oil companies for example and some even hold gambling stocks. On the whole,most fund groups now have some ESG offerings. We’ve also seen a rise in the number of positively-positioned impact funds, whose focus is to invest in order to meet the requirements of the United Nations’ 17 Sustainable Development Goals. These impact funds appeal to more positively-focused ESG investors. With so many more funds with a Global ESG approach and far better ethical and SRI/ESG criteria which are well managed, it means we have a much broader fund universe available to us.All of this has meant that our range of portfolios has continued to evolve over the decade and is extremely well positioned to capitalise on all the investment opportunities which are now present.


IFAM: How is your strategy positioned? Do you see the MPS as having a particular target client segment?

WB: Yes there is. We position the MPS for those clients who typically will have less than £250,000 to invest and where CGT should not become a major issue in the investment mix. Above this of course, we offer a more bespoke service which is ideally suited to the needs of larger investors. As we’ve already discussed, the MPS is purposely focused on ethical considerations. What we’ve learned over the years is that when clients become interested in the idea of ethical investment, they tend to get much stricter with their ethical criteria over time as their experience of investing this way grows. For us, it is far more important that the client continues to trust their adviser and for us, as well as being trusted to manage the investment proposition, we also need to be trusted to meet the ethical criteria too. Therefore we have often taken a more cautious approach to investment which has ethical selection right at its heart. This way we can have confidence that it will lead to better outcomes for the clients on both investment and ethical grounds.

Our five models are risk-based, ranging from cautious to adventurous and are designed to suit different clients’with a range of risk and income requirements. It is still the case that the more ethically-driven is the focus of a particular strategy, then the higher the corresponding risk involved with that strategy becomes. So, in essence, darker green portfolios will therefore have higher risk profile than lighter green.

IFAM: How do you manage risk within the portfolios?

WB: We manage risk primarily through our asset allocation strategy. It’s an important aspect and one where we like to go into great detail. For example, in the fixed income arena, we will move between index-linked and conventional holdings. Going deeper into this, within the conventional arena we will then make decisions on the merits of higher grade bonds versus lower grade corporate bonds. Duration of bond funds is also an important factor for consideration. In the past, we’ve included two index-linked funds which didn’t have a specific ethical mandate. However, through our deep-dive of the funds’ holdings, they still met the ethical criteria and therefore were included for a time. This helped reduce the overall risk on the portfolios. As this highlights,we always look in great detail at the underlying holdings of every fund which comes across our radar as a possible and eligible investment so that we can ensure that the overall portfolio accurately meets our objectives. After all,it’s those holdings which are the real truth, and in turn the reality of the portfolio.

The geographical allocation is considered too, not just fora particular company’s country of listing but also where that company makes their money. For example, many of the UK’s largest companies derive most of their profits from overseas and therefore we need to consider that risk. This has contributed to our portfolios demonstrating lower volatility when compared to broad market indices.


IFAM: Looking ahead, what do you see as the main challenges for the MPS and the market in which it is positioned? How are you looking to overcome those?

WB: We see green wash as a major challenge going forward as almost every major company strives to justify its approach as ethical. Some companies we have seen have made some very genuine progress. A good example of this is Danish Oil and Natural Gas, a company which successfully transformed itself into Orsted, a renewables-led utility which became one of the biggest owners of renewable assets in the world.

However, in other cases we are concerned to see that companies are spending a lot on PR campaigns but they are doing very little in reality. Some of the oil majors are examples here. To us, maintaining a clear ethical stance and a good understanding of what our investors actually want is paramount. Ethics are dynamic after all. Just five years ago, fossil fuel companies were perhaps viewed more positively than they are now. It’s a classic example of how people’s opinions may also change.

So to sum up, we view our approach as having two criteria instead of just one. Both of these are hugely important.Firstly, we aim to deliver attractive investment returns for our investors – a principle which also applies to any of the third party fund managers we use. We then over lay our focus on sustainability and responsible investment criteria. We see good corporate governance as a sign for good companies. Evidence is now backing this up, that companies which focus on sustainable strategies actually perform better for investors.

Of course, performance will differ over time especially as oil/commodity prices still have a big impact on conventional indices but much less so when it comes to ethical portfolios.

Whilst we must expect performance to be different to the broader market, we can rest assured that we know why those differences are there, as will our investors,and that we can continue to deliver attractive returns for investors across all our portfolios and of course meet their ethical criteria

About Wayne Bishop



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